Although markets have come back a bit this summer, the economy
remains undeniably shaky. Growth in the American economy is coming
in below 2%, although the level is still in the positives, giving
hope to some investors as we approach the end of the year.
Yet, there are many risks to the American economy as
unemployment levels remain stubbornly high, Europe is still in
shambles, and emerging market growth rates are coming down for the
major economies. Still, on the positive side, the housing market is
starting to trend back higher while the Federal Reserve could be
poised to embark on another round of easing (see
Three Low Beta ETFs for the Uncertain Market
However, even as the Federal Reserve adds to the QE program, the
market and the economy at large will likely be stuck in a narrow
range, much as it has been for most of 2012. The first two rounds
of QE have had little impact on driving the economy back to solid
levels of growth so it is somewhat questionable if another round
will have any different results.
These conflicting data points and the lack of government
measures to truly stimulate the market, suggest that we are likely
to see a 'muddle through' economy for the foreseeable future. In
other words, markets are likely to oscillate around their current
level, but will be unable to breakthrough either to the downside or
the upside. Meanwhile, growth will probably stay in the
1.5%-2.5% range as well; not enough to truly bring back the
economy, but certainly not a recession either.
In this type of economic environment, stocks-in aggregate-are
likely to offer little in returns, forcing investors to only choose
the best securities for purchase. Additionally, the uncertain
outlook could increase volatility and make correct selection of
securities all that much more important, especially for low risk
Three ETFs to Prepare for the Fiscal Cliff
For those who find themselves in this group, a look at some low
risk ETFs could be an excellent way to round out a portfolio and
its exposure. While correct stock selection is probably necessary
in order to generate positive returns in this kind of climate, a
look at some lower volatility ETF products could provide some
stability as well as being able to offer up at least some equity
In light of this, we have highlighted a few ETFs below that are
decidedly low risk and have generally low levels of correlation to
the broad markets. That way, investors can still play stocks but
can ensure that when the uncertain market is going one way, at
least some of their portfolio is going the other, thus improving
diversification levels and making for a potentially better
portfolio in this shaky environment:
IQ Hedge Multi-Strategy Tracker ETF (
For investors seeking a low-correlation play on the broad
markets, it is hard to go wrong with IndexIQ's QAI. The fund is one
of the more popular ETFs from the upstart ETF issuer, and uses a
fund-of-funds methodology to achieve its objective and track the IQ
Hedge Multi-Strategy Index.
This benchmark harks back to the 'traditional' definition of a
hedge fund in that it looks to be a market neutral play that can
deliver returns in any economic environment. It does this by
seeking to match broad hedge fund strategies including long/short
equity, global macro, market neutral, event-driven, and many others
Does Your Portfolio Need A Hedge Fund ETF?
By using this wide combination of strategies in a fund-of-fund
way, investors are left with a well diversified product that has an
extremely low beta. In fact, according to the fund's fact sheet,
the index beta against the S&P 500 is just 0.29, while the
standard deviation for the fund is below 10% (for a one year
It also doesn't hurt that the fund has a heavy weighting in
fixed income securities, including two of the top three holdings.
Yet, beyond this, the fund does have a smattering of equity ETFs in
its basket including ones targeting the EAFE markets, small caps,
and the broad U.S. market.
Still, the combination of bonds, currencies, commodities and
equities, has kept QAI very stable but in a definite uptrend over
the year-to-date period, as it has gained 3.2% since the start of
the year. Yet, investors should also note that the product has been
extremely stable, trading in a range of just $26.60 to $28.80 over
the last 52 weeks.
Unfortunately, investors do have to pay for this broad exposure
with somewhat high fees, as total costs come in at 1.06%. While
this is high for the ETF world, it is far lower than what more
typical hedge funds charge, leaving more for investors in terms of
IQ ARB Merger Arbitrage ETF (
For another play on the market that takes more of a pure equity
approach, investors should consider another fund from IndexIQ, MNA.
This product tracks the IQ ARB Merger Arbitrage Index which looks
to give investors exposure that is representative of global merger
This process is done by investing in global companies for which
there has been a public announcement of a takeover by an acquirer.
The idea is to buy the company's shares at a price below the target
price and then profit from the spread once the deal goes through.
This could be especially true if the deal closes at a price above
the initial takeover target price, potentially giving investors
solid gains (read
Time for a Merger Arbitrage ETF?
However, it should be noted that no deal is guaranteed and that
investors could lose out if the purchase is called off by the
acquirer. Still, the strategy has proven to be a low correlated way
to play equities and this fund also employs an equity hedge which
can help to protect portfolios in down markets.
In fact, according to the fund's most recent fact sheet, the
index of MNA's beta compared to the S&P 500 is just 0.3, while
the standard deviation over the last one year is below 12%.
Unfortunately, costs are somewhat high at 76 basis points a year,
while volume is rather low-suggesting wide bid ask spreads-which
could add to total costs (also see
Gold ETFs: Why Bid Ask Spreads Matter
Nevertheless, MNA has proven to be a very stable performer that
moves pretty much independent of the market over the past year. The
fund has stayed in a range of just $21.8/share to $26.7/share in
the trailing 52 week period and has added about 3.2% in the time
Given these decent numbers and the low volatility inherent in
the fund's style, it could be a great choice for today's muddle
through economy. The product looks to slowly add over time and will
likely move independent of broad market woes, making it a great
choice for both a flat or an uncertain market situation.
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IQ-MERGER ARB (MNA): ETF Research Reports
IQ-HEDGE MUL-ST (QAI): ETF Research Reports
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