Thoughts on 2 New IndexIQ ETFs

IndexIQ, the "hedge fund" ETF company, is planning to launch two new ETFs this week: the IQ CPI Inflation Hedged ETF and the IQ Arb Global Resources ETF. The links point to information about the underlying indexes including the holdings.

CPI is supposed to "provide a hedge against changes in the U.S. inflation rate by providing a 'real return' or a return above the rate of inflation," while GRES is designed to pick stocks based on momentum and valuation and use ETFs to hedge.

CPI allocates 54% to the iShares Short (as in short term) Treasury Bond ETF (SHV), 29% to the SPDR version of the same fund, 8% to the iShares 20+ Year ETF (TLT), 7% to GLD which clients own and less than 1% in the Rydex Yen ETF (JPY) and PowerShares DB Oil Fund (DBO).

There is a presentation about the funds on Thursday that I will try to participate in, but I don't see where all the treasury exposure can contribute to a long term result consistent with the objective. The yen and oil could help out, but not at those weightings. Can oil double from here? Even if it does, it only adds a few basis points to the result and I'm thinking that if oil doubled from here the price of a lot of other things would go up, too. As for the yen, I don't thing the green back can cut in half against the yen, but if it does, again, the position adds nothing substantial to the fund's result. Will gold go up 50%? Even if you think so, the fund would only get 350 basis points from such a move.

The fund can and probably will make changes to the holdings periodically and right here right now inflation is not really showing up in the consumer price index, but I'd think there'd be some use of TIP ETF.

GRES is baffling in another way. So commodity related stocks with a little hedging, seems simple enough. The largest holding is Sandvik (SDVKY.PK) from Sweden. I don't know it very well but it makes mining equipment, maybe like a Swedish Joy Global (JOYG)? It might be a fine company but somehow it weighs in at 8.1% of the index; not the fund, the index. There are seven other companies with a greater than 3% weighting, 20 names with 1-3% inclusive and 90 stocks with 0.20% weightings or less, including 25 stocks with a 0.01% weighting. If they seed the fund with $10 million then the fund would be buying $10,000 worth of those 25 stocks. That's a lot of commission dollars.

In reality, I'm sure the prospectus allows for sampling that one way or another allows for not having to buy every single stock. A process that allows for 8% into one stock and that many names with microscopic weights is difficult to figure without an explanation.

It looks as though the expense ratio for CPI will be 0.65% and 0.75% for GRES. Conceptually these could be very interesting; maybe I can glean a more favorable understanding after their presentation.

Comments

[Robert Mart...:]

Roger,

I agree about the IndexIQ CPI fund: It's weightings don't offer much value added, especially considering the lower-cost alternatives.

In fact, the Inflation Hedged ETF appears positioned to UNDERPERFORM, given its high weight in short-term Treasurys. Quant easing by the Fed has bid up prices for Treasurys across the yield curve, making U.S. government bonds a poor place to find value, much less inflation protection. As you noted, TIPs are a better bet, or WIPs if an investors wants to avoid exposure to the U.S. dollar.

As for the GRES, the vast number of tiny positions make it seem less like an ETF and more like an inefficient, actively managed mutual fund.

Given the expense ratios of 0.65% for the Inflation Hedged ETF, and 0.75% for the GRES, these products are an unattractive way to make a thematic bet. I expect ETFs to be liquid and low-cost, but these products are neither. Perhaps IndexIQ has something else in mind, and you will discover this on Thursday. For now though, each of these ETFs seems like a solution in search of a problem.
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On a related note, Barclays is launching a series of actively managed ETF portfolios for high-net-worth investors, which I describe here: seekingalpha.com/artic... These portfolios will be run by their global asset allocation team, and are available to clients with over $10 million in assets.

Unfortunately, these ETFs from IndexIQ are unlikely to make the cut at Barclays.

Thanks for the article!
Rob

Oct 27 11:39 AM

[Bob Mayo:]

The unique thing about the prior IndexIQ product, QAI, was not its current holdings, but rather the algorithm used to shift the holdings around. Is it the same with these? If so, it one could could easily contain 80% treasuries now but have only 10% two quarters from now.

More important than the current holdings is how have the algorithms performed in the past, and is there any reason to believe they will continue to perform that way?

Oct 27 02:37 PM

[Index Guy:]

It certainly may make sense to look into the positioning and methodology which are available on the firm

Oct 27 11:15 PM

[Index Guy:]

It certainly may make sense to look into the methodology which you can find on the IndexIQ website. I look forward to your evaluation after you learn more about these strategies. The other strategies from IndexIQ that have been in the market since last year seem to have perform as advertised. I use them and have had good success.

Oct 27 11:21 PM