Thoughts on 2 New IndexIQ ETFs

by: Roger Nusbaum

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 (NYSEARCA:SHV), 29% to the SPDR version of the same fund, 8% to the iShares 20+ Year ETF (NYSEARCA:TLT), 7% to GLD which clients own and less than 1% in the Rydex Yen ETF (JPY) and PowerShares DB Oil Fund (NYSEARCA: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 (OTCPK:SDVKY) 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.

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