Two Inflation Hedge ETFs Launched by Index IQ

October 27, 2009 by  
Filed under Commentary, ETF IPOs (New ETFs), ETFs

Today IndexIQ announced the introduction of two new ETFs designed to protect investors from inflation: IQ CPI Inflation Hedged ETF (CPI) and IQ ARB Global Resources ETF (GRES).

The IQ CPI Inflation Hedged ETF (CPI) seeks to hedge against changes in the U.S. inflation rate by providing a “real return,” or a return above the rate of inflation as measured by changes in the Consumer Price Index.

The CPI overview and brochure state that the top holdings are currently iShares Barclays Short (term) Treasury Bond (SHV) 54%, SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL) 29%, iShares Barclays 20+ Year Treasury Bond Fund (TLT) 8%, and SPDR Gold Trust (GLD) 7%.

I have to disagree with IndexIQ’s claim that CPI is the first US-listed real return ETF.  I believe the iShares Barclays TIPS Fund (TIP), launched way back in 2003, holds that honor.  The CPI ETF is an ETF of ETFs, which means that its 0.48% expense ratio is added on top of the expenses of the underlying ETFs.  Hence the real expense ratio will vary as the holdings change.

The IQ ARB Global Resources ETF (GRES) seeks to solve a problem common in broad-based commodity products: overweighting of the energy sector.  GRES also tries to hedge against inflation and a real return through exposure to a diversified portfolio of commodity-related equities.

The GRES overview and brochure state that the top holdings are currently Sandvik AB (SAND) 8.0%, Sumitomo Metal Mining (STMNF) 6.7%, ProShares UltraShort S&P 500 (SDS) 4.7%, ProShares UltraShort MSCI EAFE (EFU) 4.6%, and Barrick Gold (ABX) 4.5%.

IndexIQ claims GRES is the first global resources hedged ETF.  GRES is an ETF of ETFs and can also hold individual stocks, which means that its 0.75% expense ratio comes on top of the expenses of the underlying ETFs.

Both CPI and GRES are expected to change their holdings dramatically over time, including the use of leveraged and inverse ETFs. Weights of the underlying index components will be rebalanced on a monthly basis.  The presence of leveraged and inverse ETFs, along with the inability to rebalance during the month, could potential add significant risk to both the new ETFs.

The prospectus for CPI and GRES also covers the IQ ARB Merger Arbitrage ETF (MNA), but there is no indication as to when that fund might launch.

IndexIQ’s first ETF, IQ Hedge Multi-Strategy Tracker ETF (QAI), was launched in March and has attracted enough investor interest to push its average daily value traded (ADVT) above $1 million.  Their second ETF, IQ Hedge Macro Tracker ETF (MCRO), was launched in June.

Disclosure compliant with FTC 16 CFR Part 255 covering myself and my employer: Long GLD, SHV, and TIP. No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.


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