Relatively small ETF issuers continue to lead the charge on the
product development front, adding a host of new funds to the
landscape. The latest to add to their lineup appears to be the New
York based firm IndexIQ with a new hedge fund focused ETF.
This new product, the IQ Hedge Market Neutral Tracker
ETF ( QMN ) , looks to further round out the
company's hedge fund replication lineup, marking the fourth such
fund to zero in on hedge fund strategies. However, while the four
may be similar overall, there are some key differences between this
fresh ETF and those that are already out on the market (read Two ETFs for the Muddle Through Economy ).
First off, QMN looks to take a market neutral approach that
utilizes both long and short positions in order to minimize
exposure to systematic risk. This is unlike the company's other
products which either use a macro approach ( MCRO
) , a broad replication technique ( QAI
) , or their merger arbitrage focused fund, MNA .
This is done by following the IQ Hedge Market Neutral Index
which seeks a performance that is similar to the universe of market
neutral hedge funds, thus giving the product a low correlation
level to the broad equity market. The approach generally consists
of investing in a variety of ETFs to accomplish this task, leading
to a 75 basis point expense ratio, and then added fees to bring the
total expense ratio to 0.99% (read Charles Schwab Slashes Fees on Entire ETF
As of right now, this approach gives the fund a heavy
concentration in bond ETFs with BSV and
accounting for just over 47% of assets. Rounding out the top five
are two more bond funds- BND and AGG
-while the first equity fund, EFA ,
also makes an appearance in this group as well.
According to the fact sheet, by using this approach the
underlying index has seen a beta of just 0.25 against the S&P
500, suggesting that it offers an extremely uncorrelated
performance. Furthermore, although the index has underperformed
broad markets over longer time frames, the benchmark has seen a
much lower maximum drawdown-and a quicker return higher-than the
broad market over the same time frame ( Four Easy Ways to Play Volatility with ETFs
"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," said Adam Patti, IndexIQ CEO 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.
While QMN fills a niche for IndexIQ in their fund lineup, it
could face some competition from a few other market neutral funds
already on the market. In fact, QuantShares has a lineup of market
neutral funds, each of which charge 99 basis points as well.
Currently, the lineup includes seven funds, all of which target
the broad U.S. market with a market neutral approach. The company
offers a variety of picks that focus on items like size, quality,
and value, although it should be noted that these only track
equities while QMN will utilize a wide number of ETFs across a
variety of asset classes for its exposure.
However, many of these QuantShares funds haven't exactly taken
off in terms of assets under management, suggesting that either the
strategy hasn't caught on with investors, or that IndexIQ can
easily step in and become a dominant player in the market neutral
space (see Uncertain about the Economy? Try Market Neutral
Either way, QMN looks to be an interesting low volatility choice
in this uncertain market environment, especially for those
searching for a 'neutral' approach. Furthermore, while the fees may
be high relative to broad markets, they are in line with other
market neutral products out there, suggesting that QMN could be an
intriguing pick with the current economic backdrop.
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(BSV): ETF Research Reports
(MCRO): ETF Research Reports
(MNA): ETF Research Reports
(QAI): ETF Research Reports
(QMN): ETF Research Reports
(SHY): ETF Research Reports
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