IndexIQ, the "hedge fund" ETF company, is planning to launch two new ETFs this week; the IQ CPI Inflation Hedged ETF (CPI) and IQ Arb Global Resources ETF (GRES). The links point to information about the underlying indexes including the holdings.
CPI is supposed to "provide a hedge against changes in the U.S. inflation rate by providing a 'real return' or a return above the rate of inflation" and GRES is supposed to pick stocks based on momentum and valuation and use ETFs to hedge.
CPI allocates 54% to the iShares Short (as in short term) Treasury Bond ETF, 29% to the SPDR version of the same fund, 8% to the iShares 20+ Year ETF, 7% to GLD which clients own and less than 1% in the Rydex Yen ETF (JPY) and PowerShares DB Oil Fund.
There is a presentation about the funds on Thursday that I will try to participate in, not sure that I can, that will explain the funds but I don't see where all the treasury exposure can contribute to a long term result consistent with the objective. The yen and oil could help out but not at those weightings. Can oil double from here? Even if it does it only adds a few basis points the result and I'm thinking that if oil doubled from here the price of a lot of other things would go up too. As for the yen, I don't thing the green back can cut in half against the yen but if it does, again the position adds nothing substantial to the fund's result. Will gold go up 50%? Even if you think so, the fund would only get 350 basis points from such a move.
The fund can and probably will make changes to the holdings periodically and right here right now inflation is not really showing up in the consumer price index but I'd think there be some use of TIP ETF.
GRES is baffling in another way. So commodity related stocks with a little hedging, seems simple enough. The largest holding is Sandvik from Sweden. I don't know it very well but it makes mining equipment, maybe like a Swedish Joy Global? It might be a fine company but somehow it weighs in at 8.1% of the index, not the fund the index. There are seven other companies with a greater than 3% weighting, 20 names with 1-3% inclusive and 90 stocks with 0.20% weightings or less including 25 stocks with a 0.01% weighting. If they seed the fund with $10 million then the fund would be buying $10,000 worth of those 25 stocks. That's a lot of commission dollars.
In reality I'm sure the prospectus allows for sampling that one way or another allows for not having to buy every single stock. A process that allows for 8% into one stock and that many names with microscopic weights is difficult to figure without an explanation.
It looks as though the expense ratio for CPI will be 0.65% and 0.75% for GRES. Conceptually these could be very interesting maybe I can glean a more favorable understanding after their presentation.
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13 comments:
Is the introduction of so many ETFs the 2000's version of the 1990's mutual fund explosion? While our firm utilizes ETFs extensively, I am concerned about the sheer number of new funds and the seemingly lack of SEC oversight. Is a new obfuscation bubble forming?
I've never really understood why Ishares left the word "term" out of the title of "short treasury ETF." It's confusing.
I ran some numbers this weekend per request. Here are results for 75%/50% on the S%P 500 and several portfolios.
Those do seem like unusual weightings for CPI, but to their credit, at least they're out in front of the inflation threat. It's probably a useful exercise to go through one's portfolio now, while inflation is a non-issue, and ask what steps you'd take in the event of renewed/hyper-inflation.
The mix in these two IQ funds doesn't make a lot of sense on the face of it, at least to me, and I'm not sure more details will help: Arbitraging resources primarily with equities is old hat and easy to DIY unless they are talking some pretty sophisticated pair trading or something akin and a CPI fund w/o TIPs and significant weightings in commodities and floaters or other strongly interest-rate responsive assets seems unlikely to produce a real return in an inflationary environment once expense ratio and trading costs are factored in. Dunno.
Nice number crunching there SD, looks like arithmetic wins again [g]: The 75/50 strategy used w/ any portfolio, even a solo equity index or the very modest Starter, reduces volatility and improves long-term results. Interesting that slightly more complex portfolios with lower vol do even better at 75/50. Might be interesting to compare mixes with different control percentages; for example would a 50/30 give better results for the S&P than a 75/50 but not as good for the Coffeehouse?
The Big Generalization that I noticed was that it seemed to depend on your bond allocation. Low? 75/50 looks pretty good. "Normal" i.e. 40%? Not as much difference over the long term.
I can easily add lines to the spreadsheet. Lemme know what you want.
Bond allocation would make sense as a vol dampener independent of other strategies, at least as long as the bonds were investment grade or gov (the notion that bonds are safer than equities goes out the window pretty fast in some categories).
If you're in the mood it might be interesting to see what a lower % balancing strategy would produce for each portfolio, a 50/30 say.
SD, nice work on the numbers. Seems to outperform over the last decade. Assumed it would underperf in raging bulls (see 98 and 99) and outperf in flat to lower markets. Got any way to calculate a Sharpe ratio?
Oh boy. A sharpe ratio. It can be done in theory. I'll check it out.
hehe ... no big deal, if you don't have one coded up, don't sweat it. If you're using Excel, here's one already built. Not sure how good it is, I've always done mine in code.
Here are some tips for readers of this blog to deal with video advertisements popping up all the time over Roger's text: You can you your mouse wheel to quickly scroll down and back up so that the video disappears. Alternatively you can read the post through the "Leave A Comment" interface which doesn't feature pop up videos. Just an idea...
CPI looks like a good fund actually. It is like the ETF version of the PJMDX or PDMAX mutual funds - at least if you compare the fund holdings and not the advertising copy.
There are reasons to hold SHV and BIL: they have different durations, expense ratios and custodians.
The long bonds are in there to increase current income, and also to improve convexity in case interest rates drop. (If interest rates dropped to zero for a while and/or inflation disappeared entirely then how do you get return _above_ CPI? Answer: long bonds)
Gold, Yen, and oil generally tend to go up when the dollar is being devalued. So these protect your purchasing power if the dollar slides.
The weightings for the portfolio were probably determined in part by finding the weights that provided the most consistent X% return above CPI since the 1970s when the price of gold was allowed to float again.
http://www.riskcog.com/portfolio.jsp#5fde2ac2380g988f
Here is a backtest of how CPI would have done. You can see if you can come up with something better than IndexIQ ;)
thanks Matthew
question though, any concern about the long term positive skew from the treasury market in that even if yields don't go up they cannot go down by anywhere near the same amount, on the front end they cant go down but a couple of basis points?
Hi Roger, I think you are asking about the long treasury bonds? I think the general CPI portfolio will hang together if 30yr rates start to rise. In this type of scenario gold would likely rise enough to counterbalance the bond losses. Also short term treasuries would likely see some increase in yield during that process.
In the backtest the static portfolio did fine during the late '70s when long bonds got crushed. I don't know if IndexIQ plans to make any portfolio changes as the yield curve wiggles around. It looks like they could leave it static and reasonably expect to meet objectives.
who cares, it's great for us traders, more instruments to plus into our platform to spit our trades, will be interesting designing trades for these ETF's.
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