IndexIQ Files For IQ Bear International Equity ETF

IndexIQ has filed paperwork with the SEC for a “IQ Bear International Equity ETF.” The IQ Bear International Equity ETF (the “Fund”) seeks capital appreciation through short sales of international equity securities. They did not specify a trading symbol or expense ratio in the initial filing.


Investment Philosophy

For an investor having a long position in a group of international equities (the “International Market”), adding short exposure to a diversified basket of International Market securities can help protect the investor’s capital during periods when the International Market is moving down, thereby reducing volatility and providing for more consistent portfolio returns. However, when the International Market is rising, a fully hedged International Market position can detract from, and potentially completely offset, the investor’s portfolio returns. By using a variable short exposure position, the Fund seeks to provide nearly full downside protection when the International Market is falling and to reduce the negative impact of the short exposure when the International Market is rising.

Non-U.S. companies are companies domiciled or headquartered outside of the United States, or whose primary business activities or principal trading markets are located outside of the United States. Sometimes these non-U.S. companies are traded in the U.S. on a national securities exchange, or through American Depositary Receipts (“ADRs”) or American Depositary Shares (“ADSs”). The Fund invests in common stocks and other equity securities, including preferred stocks, convertible preferred stocks, warrants, ADRs, ADSs and exchange-traded funds (“ETFs”) based on an international equity index.

Investment Process

The Fund has a variable short exposure position that is determined by the market trend, as identified by a multi-factor model employed by the portfolio management team. The minimum and maximum short exposures for the Fund are 0.625 and 1.250, respectively. The Fund’s short exposure is adjusted as follows:

  • When the model identifies a negative International Market trend, the Fund’s short exposure is increased towards the maximum short exposure.
  • When the model identifies a positive International Market trend, the Fund’s short exposure is decreased towards the minimum short exposure.
  • When the model identifies neither a negative nor a positive trend, the International Market is considered to be trendless and the Fund’s short exposure is increased or decreased, as applicable, towards the mid-point of the range of minimum and maximum exposures.

The portfolio management team runs the model each trading day and resets the short exposure if (a) the model yields a change in the International Market trend or (b) the short exposure is approaching a minimum or maximum level.

The Fund normally invests at least 65% of its total assets in the equity securities of non-U.S. companies.

Market Trend Analysis

The factors considered in the model can be classified into 3 major groups:

  1. Statistical: These factors relate to statistical properties of the International Market returns and may include volatility trends, correlations and price changes.
  2. Asset Class: These factors are focused primarily on asset classes other than equities and may include interest rates, currencies and commodities.
  3. Valuation: These factors are utilized for determining the fair value of the International Market equities and may include commonly used equity valuation metrics such as earnings.

The model does not always incorporate all of the above factors at all points in time. The inclusion of particular factors in the model is determined based on the effectiveness of those factors in correctly identifying market trends.

Security Selection

The selection and weighting of Fund securities are implemented using a sampled portfolio of the International Market. Additionally, the Fund may hold short positions in exchange-traded funds (“ETFs”) registered pursuant to the Investment Company Act of 1940 (the “1940 Act”), exchange-traded notes (“ETNs”) and other exchange-traded products (“ETPs”) whose returns are highly correlated to the International Market.

For the complete filing click: HERE

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