Alternative ETFs Can Help Hedge Your Portfolio Against Market Risk

An image of a smartphone and a pen Credit: Shutterstock photo

IndexIQ offers an array of ETFs that go beyond plain vanilla indexes in an attempt to provide superior returns and access to sophisticated investment solutions.

[ibd-display-video id=2411914 width=50 float=left autostart=true] The New York-based alternative investments provider, which manages $3.7 billion in assets, had 13 ETFs when it was bought by New York Life in April 2015. It now boasts 25 offerings in its lineup with the Dec. 13 launch of IQ Chaikin U.S. Large Cap ( CLRG ), designed to leverage a proprietary quantitative stock rating model called the Chaikin Power Gauge.

Among its other offerings is IQ Merger Arbitrage ( MNA ), which gives investors exposure to publicly announced global takeover targets. IQ Global Resources ( GRES ) goes beyond gold and oil to cover eight major commodity sectors. Both funds include short exposure to global stocks as a partial equity market hedge.

In July 2015, IndexIQ launched a suite of 50% currency hedged international ETFs, because the company identified the need for a 50% hedged fund. Before that, investors had choices of either 100% hedged or 100% unhedged funds.

"IndexIQ has never tried to follow the crowd," Salvatore Bruno, chief investment officer at IndexIQ, told IBD. "Instead, we've always sought to introduce solutions to the marketplace that help investors and advisors deal with significant issues in their portfolios. Whether that's identifying ways to add risk management and hedge fund-like returns at a fraction of hedge fund costs or creating a suite of 50% currency hedged international equity ETFs to take the guesswork out of currency fluctuations, everything we've worked on at IndexIQ has had investors in mind and the very real challenges they face in managing assets and complex markets."

List Of Top-Performing ETFs

Money Manager Plays Offense And Defense, Favors These 3 Sectors

Bitcoin Boosts Top Tech ETF; Will China Stay Red-Hot In 2018?

Bruno, whose primary responsibility includes developing and maintaining IndexIQ's investment strategies, joined the firm in 2007. Before that, he was a portfolio manager and head of Advanced Quantitative Research at Deutsche Asset Management. The full interview with Bruno follows:

IBD: Which of IndexIQ's strategies are the most popular in terms of assets and year-to-date inflow? Why are they attracting assets?

Bruno: Our largest ETF is our ($1.11 billion) IQ Hedge Multi-Strategy Tracker ETF ( QAI ), which is also the first ETF we brought to market, back in 2009. Investors have been drawn to QAI's ability to dampen volatility and mitigate risk, and it has performed exactly as designed in delivering returns in line with the HFRI Fund of Funds Index. Another of our absolute return vehicles, the ($349 million) IQ Merger Arbitrage ETF, has been attracting significant assets this year, having recently passed the $340 million mark.

Additionally, earlier this year we launched our first multifactor equity ETF, the IQ Chaikin U.S. Small Cap ETF ( CSML ), which leverages the Chaikin Power Gauge in its underlying index to identify domestic small-caps with the potential for outperformance. Since its first day of trading in May, CSML has gathered close to $300 million, making it one of the most successful new ETFs launched in 2017. On Dec. 13, we launched the IQ Chaikin U.S. Large Cap ETF, which applies the same multifactor approach to the large cap segment of the domestic market.

Our momentum-focused fixed-income ETFs, the IQ Enhanced Core Bond U.S. ETF (AGGE) and IQ Enhanced Core Plus Bond U.S. ETF (AGGP), as well as our IQ S&P High Yield Low Volatility Bond ETF (HYLV), have also attracted significant new assets this year.

The common thread for all has been that they solve a real need in investors' portfolios, whether it's in providing risk management solutions, offering the potential for attractive yields with lower volatility, or delivering strong risk-adjusted returns.

IBD: IQ 50 Percent Hedged FTSE International ETF (HFXI), IQ 50 Percent Hedged FTSE Japan ETF (HXFJ) and IQ 50 Percent Hedged FTSE Europe ETF (HFXE) have produced solid returns this year. Any particular reason for their performance, and do you expect it to continue into 2018?

Bruno: Yes, these are the funds in our 50 percent currency hedged international equity suite. They've delivered solid returns as those markets have had a strong 2017. Just as important, they've allowed investors to mitigate the potential negative impact that currency fluctuations can have on an international equity exposure. If an investor chooses a 100% currency hedged or an unhedged international equity ETF, they're making an inherent bet on the direction of the U.S. dollar, and history has shown us that no one gets that bet right consistently. We expect international markets to remain strong in 2018 and for U.S. investors to continue to look abroad for growth as our own economy continues to grow at a relatively slower pace. As to how the dollar will respond, that's up for debate, but for investors in our suite of "half hedged" ETFs, it's less of a concern.

IBD: IndexIQ launched two fixed-income ETFs, IQ MacKay Shields Municipal Insured ETF (MMIN) and IQ MacKay Shields Municipal Intermediate ETF (MMIT), in October. Why did you launch these and how have they been performing?

Bruno: We're very excited about these two funds since they represent a continuation of our strong partnership with MacKay Shields, one of the world's leading fixed-income managers and, like IndexIQ, part of the New York Life Investment Management multiboutique family. As I'm sure you recall, IndexIQ was acquired by New York Life in 2015, and relationships like these with other boutiques under the New York Life Investment Management umbrella was one of the attractions to us as a firm. MacKay Shields and others, like Candriam Investors Group, which launched a suite of ESG ETFs in Europe last year under the IndexIQ brand, are tremendous partners for us in the product development process. The IQ MacKay Shields Municipal Insured ETF and IQ MacKay Shields Municipal Intermediate ETF have performed well so far and we've been very pleased with the response they've been getting. They're also our first entry in the active ETF category, which is something we'll continue to explore.

IBD: Interest rates are expected to go up in 2018. What types of ETFs will be the best prospects for investors in a rising rate environment?

Bruno: Plain vanilla fixed-income exposures are likely to struggle as interest rates continue to tick up, and there is no shortage of ETFs with exposure to plain vanilla. That's one of the reasons why we've worked to build a thoughtfully constructed suite of active and passive bond ETFs.

IBD'S TAKE:Making money catching ETF uptrends requires knowledge about how to read charts. You can learn how at IBD University .

IBD: What's your 2018 outlook for the U.S. and international equity markets?

Bruno: We see steady performance on the horizon for the domestic market in 2018, with slightly better performance in the international markets.

IBD: Are there certain sectors you think will fare better next year? Why?

Bruno: We tend not to make sector-focused "calls," but we continue to believe in the long-term prospects of the commodity sector, something that's well captured by our IQ Global Resources ETF, which includes exposure to all of the major commodity sectors plus timber, water and coal.

We're also bullish on the continued strong pace of mergers and acquisitions activity across a number of sectors. Companies remain flush with cash, and will likely only be more so if we see movement on the tax reform front, and they will look to put that cash to work in expanding into new markets or gaining added market share via the M&A route. A strong M&A climate bodes well for a well-constructed merger arbitrage strategy.

IBD: How do you think the tax reform bill will affect the overall U.S. market?

Bruno: As of the time we are speaking (Dec. 12), Congress appears to be getting closer to a final tax reform bill. We think tax reform will be a net positive to the markets, though it will impact different companies in different ways. One part of the market we're looking at very closely through the lens of tax reform is domestic small-cap equities. Small-caps tend to pay higher tax rates than their mid- and large-cap brethren, and meaningful tax reform could have a significant positive impact in this space. A number of the companies in the index underlying our ETF CSML could be well-positioned to benefit from all of this in 2018.

IBD: IndexIQ has been a smart beta pioneer, and smart beta continues to be popular. What other trends do you see occurring in the ETF space, or what do you think will be next?

Bruno: Whether one calls it smart beta or multifactor investing or strategic beta, the growth of this category is likely to continue in 2018, both in terms of the number of funds and the assets being gathered. I'm excited about our product pipeline in that area. I'm also excited about another trend we're actively involved with, as exemplified by our MMIN and MMIT launches, namely successful active managers bringing their strategies to market in an ETF wrapper, giving the marketplace even more choices when it comes to how to incorporate best-in-class managers. I point back to my comments about being part of the New York Life Investment Management multiboutique universe and all of the opportunities that affords us to partner with leaders in their fields to bring investors thoughtful, well-designed portfolio solutions through the liquid, transparent, low-cost lens of the ETF.

IBD: Anything else about IndexIQ's ETFs you'd like our readers to know?

Bruno: We pride ourselves not only on our investment approach but also on our dedication to education. Being first to market so many times wouldn't have accomplished nearly as much if we hadn't had a singular focus on explaining our vision and the utility of our approach each and every time we came to market with something new.


This Is Where ETF Leader Sees The Biggest Opportunity In 2018

What Does ETF Innovator See As Next Big Emerging-Market Trend?

What's Next For This Top ETF Provider And Smart-Beta Pioneer?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.