IndexIQ has filed paperwork with the SEC for a “IQ Bear Small Cap U.S. Equity ETF.” The IQ Bear Small Cap U.S. Equity ETF (the “Fund”) seeks capital appreciation through short sales of U.S. listed small cap equity securities. They did not specify a trading symbol or expense ratio in the initial filing.
PRINCIPAL INVESTMENT STRATEGIES
For an investor having a long position in a group of small cap U.S. equities (the “U.S. Small Cap Market”), adding short exposure to a diversified basket of U.S. Small Cap Market securities can help protect the investor’s capital during periods when the U.S. Small Cap Market is moving down, thereby reducing volatility and providing for more consistent portfolio returns. However, when the U.S. Small Cap Market is rising, a fully hedged U.S. Small Cap 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 U.S. Small Cap Market is falling and to reduce the negative impact of the short exposure when the U.S. Small Cap Market is rising.
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 U.S. Small Cap Market trend, the Fund’s short exposure is increased towards the maximum short exposure.
- When the model identifies a positive U.S. Small Cap 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 U.S. Small Cap 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 U.S. Small Cap Market trend or (b) the short exposure is approaching a minimum or maximum level.
Market Trend Analysis
The factors considered in the model can be classified into 3 major groups:
- Statistical: These factors relate to statistical properties of the U.S. Small Cap Market returns and may include volatility trends, correlations and price changes.
- Asset Class: These factors are focused primarily on asset classes other than equities and may include interest rates, currencies and commodities.
- Valuation: These factors are utilized for determining the fair value of the U.S. Small Cap 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.
The selection and weighting of Fund securities are implemented using a sampled portfolio of the U.S. Small Cap 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 U.S. Small Cap Market.
For the complete filing click: HERE