Israel Englander's Top Disclosed Holding Is an iShares Russell 2000 ETF, a Bet on Small-Cap Stocks Broadening Out the Rally

Many market participants, even some professionals and certainly plenty of newbies, are inspired by famous investors. That adulation is understandable. After all, most famous investors attained that status for a simple reason: They're market-beaters, having consistently accomplished that feat.

Hence, so many investors worship at the altar of Warren Buffett and go out of their way to add Warren Buffett investments to their portfolios. Obviously, do-it-yourself investors are unlikely to get the same prices Berkshire Hathaway gets, but buy stocks such as American Express and Coca-Cola and, boom, you're investing like Buffett.

A famous investor holds put options on a small-cap ETF, but there's more to the story. Image source: Getty Images.

Mirroring other famous investors isn't always that easy. Let's look at an example in which investors who want to follow a highly accomplished money manager need to do so by digging a bit further.

Options galore on a small-cap ETF

At the end of the first quarter, the largest position on a percentage basis at Israel "Izzy" Englander's Millennium Management was put options on the iShares Russell 2000 ETF (NYSEMKT: IWM). Also among the firm's top five positions was call options on that same exchange-traded fund (ETF), which is the third largest in its category.

So what gives? Can Englander not make up his mind? This is why it pays to dig deeper into what famous investors are doing instead of following them blindly. In this case, simply because Millennium holding puts on the iShares ETF doesn't mean England is espousing a bearish view on small caps. Ordinary investors who interpreted Millennium's puts on the small-cap ETF as negative commentary and who followed suit likely lost money, because the fund is up 18.8% this year.

It should be noted that Millennium has thousands of positions, many of which are long. So what Englander is doing with the substantial put position in the iShares ETF is protecting the firm's long holdings in the event markets turn south rapidly. He's not saying small caps stink, but rather saying, "I'm prepared."

That's what's called hedging, and Millennium is, well, a hedge fund. Indeed, if markets went haywire, the puts on the iShares ETF would pay off handsomely, because roughly 40% of Russell 2000 members aren't profitable, and those are the types of companies that get severely punished in bear markets.

Tough betting against small caps

Investors ought to be careful betting against the $79.5 billion iShares ETF. As noted above, it's up almost 19% this year, and that's without the Federal Reserve lowering interest rates, which often helps capital-needy smaller companies.

Plus, small caps are coming off their best first-half performance in decades, and earnings estimates for the group are surging. And as market participants scurry to find opportunities outside technology, small-cap ETFs stand to benefit. For its part, the iShares fund allocates just 12.8% of its portfolio to tech stocks.

Bottom line: Don't read too deeply into Englander's puts on the iShares Russell 2000 ETF, because the fund and its peers have bullish momentum on their side.

American Express is an advertising partner of Motley Fool Money. Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends American Express and Berkshire Hathaway. The Motley Fool has a disclosure policy.