ETFs Skirting Herbalife Saga...For Now

For better or worse, exchange traded funds are not intimately involved in the Herbalife (NYSE:HLF) tussle.

That being the one where Pershing Square founder Bill Ackman is short 20 million shares of the nutritional supplements maker on the thesis that the company is pyramid scheme. The same one where Carl Icahn, Dan Loeb and other hedge fund luminaries have amassed significant stakes in Herbalife perhaps more because they dislike Ackman personally than for any other reason.

For now, not many ETFs offer exposure to Herbalife. Although BlackRock (NYSE:BLK), owner of iShares, the world's largest ETF sponsor, recently increased its stake in Herbalife, few iShares ETFs feature Herablife among their lineups. None have what could be deemed as "significant" exposure to the stock.

For example, the $161.6 million iShares Morningstar Mid Growth Index Fund (NYSE:JKH) features a weight of just 0.36 percent to Herbalife.

Vanguard, the third-largest U.S. ETF issuer, is another large holder of Herbalife shares, but the stock is not on prominent display in any of the fund's highly popular index ETFs. Herbalife can be found in the Vanguard Mid-Cap Growth ETF (NYSE:VOT), but at a scant percentage of the 239-stock ETF's weight.

All that said, Herbalife's ETF status could (emphasis on "could") change thanks to a pair of funds designed to give retail investors exposure to hedge fund-style tactics without the burden of paying a hedge fun manager two percent to get in the door and 20 percent of profits.

The AlphaClone Alternative Alpha ETF (NYSE:ALFA) and the Global X Top Guru Holdings Index ETF (NYSE:GURU) both debuted in the second quarter of last year to a fair amount of criticism from naysayers that believed the funds were too narrowly focused.

At their respective cores, the objective of each is to give investors exposure to stocks that pop up in 13F filings made by hedge funds. For example, ALFA tracks the AlphaClone Hedge Fund Long/Short Index, which "uses AlphaClone's proprietary Clone Score methodology to aggregate on a quarterly basis the ideas of hedge funds for which historically it has made the most sense to follow based on their disclosures. The index also employs a hedge mechanism that allows the index to vary from being long only to market hedged," according to the ETF's fact sheet.

Global X's GURU tracks the Top Guru Holdings Index, which "is comprised of the top U.S. listed equity positions reported on Form 13F by a select group of entities that Structured Solutions AG characterizes as hedge funds," according to its fact sheet.

Neither ALFA nor GURU currently hold any shares of Herbalife. ALFA's adjustment date is February 27 and due to regulatory restrictions, the fund's issuer cannot comment on possible additions and subtractions from the ETF prior to that date. Apple (NASDAQ:AAPL) and American International Group (NYSE:AIG) combined for 10.5 percent of ALFA's weight as of February 14. Other top-10 holdings in the ETF include names that frequently populate 13F filings such as Google (NASDAQ:GOOG) and Simon Property Group (NYSE:SPG).

GURU, which utilizes 13F filings to compile the top stock holding from the hedge funds in its selection pool, screens for liquidity and uses an equal-weight approach. Currently home to 47 stocks, GURU's top holdings include Pandora (NYSE:P), J.P. Morgan Chase (NYSE:JPM) and Canadian Pacific Railway (NYSE:CP). Coincidentally, Canadian Pacific is one of Ackman's largest holdings.

To be clear, there are no guarantees that Herbalife will find a home in ALFA or GURU. However, with Icahn, Loeb and others showing long positions in the stock, it is not out of the realm of possibility that at least one of these ETFs will include Herbalife at some point.

Then again, assuming Ackman is right and Herbalife is destined to trade significantly lower, ALFA and GURU may not want to ruin a good thing. For all the criticism these funds received following their respective debuts, both have surged since then. GURU is up more than 27 percent since June 2012 while ALFA is up 21.1 percent since its May 31, 2012 debut.

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