IndexIQ, the New York-based developer of alternative indexes and exchange-traded funds, has taken the first step towards launching a 130/30 ETF, filing a 40-APP application with the SEC earlier this week. IndexIQ currently maintains the IQ 130/30 Index, a rules-based benchmark that employs fundamental factors to select U.S. stocks with a long exposure of 130% and short exposure of 30%. According to the company’s Web site, the index uses “a purely quantitative, multi-factor model that leverages the alpha generated by a customized quantitative model combined with the controlled use of short positions to enhance the risk-adjusted returns of the portfolio.”
InedxIQ is best known for its hedge fund replication products, including the IQ Hedge Multi-Strategy Tracker ETF (QAI) and the IQ Hedge Macro Tracker ETF (MCRO). QAI has become quickly gained traction with investors, accumulating nearly $70 million in assets according to the October NSX figures.
IndexIQ has begun aggressively expanding its product line beyond hedge funds in recent months, launching (or planning to launch) several more innovative ETFs, including:
- IQ CPI Inflation Hedged ETF (CPI): Based on an index that seeks to provide a hedge against the U.S. inflation rate by providing a real return above the CPI.
- IQ ARB Global Resources ETF (GRES): Based on an index that uses momentum and valuation factors to identify global companies that operate in commodity-specific market segments.
- IQ ARB Merger Arbitrage ETF (MNA): Will invest in companies for which there has been a public announcement of a takeover by an acquirer. MNA is expected to begin trading in November 2009.
In addition to the 130/30 fund, the IndexIQ filing also detailed “debt funds” consisting of fixed income securities and “debt-equity index funds” that offer “exposure to a diversified mix of asset classes, principally stocks and bonds, to seek to prudently maximize capital appreciation over time.”
The 130/30 strategy has been popular with investors for decades, but its marriage with the exchange-traded sructure is a relatively new development. Earlier this year ProShares launched the Credit Suisse 130/3o (CSM), the first exchange-traded fund to implement a 130/30 strategy (see our complete guide to 130/30 ETFs for a complete look at these products). CSM offers a risk/return profile similar to the S&P 500, but attempts to outweigh this market capitalization-weighted benchmark by shorting the stocks expected to deliver the weakest performance and “doubling down” on those expected to perform well. Since its inception in July of this year, CSM has gained about 21.9%, about 100 basis points ahead of SPY, a more traditional play on the S&P 500, during that period. ETFdb Pro members can see how we use CSM in our Alpha Seeker 2.0 Model Portfolio (if you’re not a Pro member yet, sign up for a free trial or read more here).
First Trust also offers the KEYnotes First Trust Enhanced 130/30 Large Cap ETN (JFT), but this fund has been slow to gain traction with investors, and currently has a market capitalization of less than $5 million and and daily volume of less than 1,000 shares. Direxion has also filed for approval on a 130/30 ETF. For updates on all the innovative new ETFs becoming available, sign up for our free ETF newsletter.
Disclosure: No positions at time of writing.