ETF Expert: Emerging Market Hedging Strategies From A Single ETF Investment

Back in late March, Index IQ offered the first ETF designed to replicate the performance of hedge fund investing. However, the so-called IQ Hedge Multi-Strategy Tracker ETF (QAI) tracks an index that the company itself devised; it does not track an independent hedge fund index created by Credit Suisse, Barclays or Dow Jones.

By itself, this is not problematic. WisdomTree created a great many fundamental indexes of passive holdings for its ETF line-up.

Yet Index IQ did not develop a passive index that they might rebalance annually, semi-annually or even quarterly. The IQ Hedge Multi-Strategy Tracker ETF (QAI) is tracking alternative investment approaches that are being rebalanced monthly. This is like a mouse developing the mousetrap AND placing the cheese.

Is there a tried-and-true way to know what you're getting? Not really. At best, you may choose to evaluate performance against other "world allocation" mutual funds like First Eagle Global (SGIIX).

Qai versus first eagle global

Granted, 10 weeks is not enough time to evaluate QAI. And without a doubt, the folks at Index IQ would denounce the comparison to a "world allocation" designation, even if the name fits!

Of course, if you can't measure performance against an independent hedge fund index, and you can't measure performance against world allocation mutual funds, you may not be left with any comparison. In truth, that may be what Index IQ was striving for (i.e., "It's so different, there's nothing else like it!")

So forgive me if I am less than enthusiastic about today's 6/9/09 launch of the IQ Hedge Macro Strategy Tracker ETF (MCRO). This new ETF is supposed to combine hedging strategies of global macro and emerging markets.

The index for MCRO uses ETFs. In essence, you're getting an active fund of existing exchange-traded funds for the expense ratio cost of .75%.

According to the "index," Macro Strategy holds both EEM and VWO, for a 33% total weight in broad emerging market investing. It holds both the iShares 1-3 Treasury (SHY) and iShares Short-Term Treasury (SHV), which are arguably very similar, for a 23% weighting in short-term U.S. treasuries.

Name Ticker Weight (%)
iShares MSCI Emerg Mrkts EEM 27.32
iShares 1-3 Yr Treasury Bond SHY 18.09
iBoxx Invest Grd Corp. Bond LQD 13.92
iShares Russell 2000 IWM 6.05
PowerShrs DB Commodity DBC 5.76
Vanguard Emerging Markets VWO 5.19
iShares Short-Term Treasury SHV 4.63
SPDR Int’l Treasury Bond BWX 3.93
PwShrs DB G10 Currency DBV 3.87
ProShs UltraShrt Real Estate SRS 3.74

IQ Hedge Macro Strategy Tracker ETF (MCRO), for the time being, looks like a decent, actively managed portfolio. You've got your obligatory commodity exposure. You have a bit of the yen carry-trade in there. You even have a "short real estate" play for believers in the "more-property-pain-to-come" camp.

MCRO offers active management in one place, while including commodities, currencies and inverse (short) funds. What it doesn't offer is any peace of mind… since there's simply no way to determine if the monthly rebalancing by Index IQ Managers will lead to good results or poor results in the months and years ahead.

The biggest downside? Some investors may be led into a false sense of security, thinking that the management team knows when to sell. When's the last time a mutual fund manager raised enough cash inside the fund to minimize enough of your losses?

Smart investors don't turn over the responsibility for selling to others. Whether you run with IQ Hedge Macro Strategy Tracker ETF (MCRO) or you don't, maintain your own stop-losses on your holdings.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site

Leave a Reply