With the recent bouts of market volatility still fresh, investors are seeking ways to diminish overall risk. In response, IndexIQ is launching a new market neutral exchange traded fund based on what hedge funds are holding.
On October 4, the IQ Hedge Market Neutral Tracker ETF (QMN) will begin trading. QMN will charge a 0.75% expense ratio.
The fund tries to reflect the performance of the IQ Hedge Market Neutral Index, which will provide transparent Market Neutral hedge fund exposure. The new ETF follows a hedge fund replication technique that profits by taking long and short positions in the markets while minimizing exposure to "systematic components" of risk. The market neutral strategy will shoot for near zero beta, or market, exposure.
"Market neutral strategies that effectively neutralize the market exposure are not impacted by directional moves in the market," according to the fact sheet.
The ETF has an index beta versus S&P 500 correlation of 0.25 -- beta is a measure of volatility or systematic risk compared to the market as represented by the S&P 500.
"Market Neutral is one of the largest hedge fund investment styles, both in terms of the number of funds and in the amount of assets being put to work," Adam Patti, IndexIQ CEO, said in a press release. "After incubating the index underlying QMN for four years, we felt it was an excellent time to roll out this strategy, particularly given the volatility and uncertainty inherent in today's market environment."
The underlying IQ Hedge Market Neutral Index has gained 2.9% year-to-date, 2.8% over the past year and 4.6% over the last three years.
QMN's index asset allocations include short-term bonds 58.7%, broad bonds 16.2%, international equity 12.8%, convertible bonds 5.1%, high-yield bonds 4.3%, and currencies 2.0%.
The ETF is a type of fund-of-funds, as it holds other ETFs. For instance, its top holdings include the Vanguard Short-Term Bond ETF (BSV) 24.1%, iShares Barclays 1-3 Year Treasury Bond Fund (SHY) 24.0%, and Vanguard Total Bond Market ETF (BND) 8.4%.
Max Chen contributed to this article.