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 (NYSEARCA: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 (NYSEARCA:MCRO), a broad replication technique (NYSEARCA:QAI), or their merger arbitrage focused fund (NYSEARCA: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 Lineup).
As of right now, this approach gives the fund a heavy concentration in bond ETFs with BSV and SHY accounting for just over 47% of assets. Rounding out the top five are two more bond funds—BNDand 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 ETFs).
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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