ETF Watch: IndexIQ Debuts Small Cap Factor Fund

May 16, 2017

Today IndexIQ is rolling out an ETF that relies on a strategy built around Chaikin Analytics’ “Power Gauge.” The IQ Chaikin U.S. Small Cap ETF (CSML) tracks the Nasdaq Chaikin Power US Small Cap Index.

The fund comes with an expense ratio of 0.35% and is listed on the Nasdaq stock exchange.

It’s fairly unusual for a firm to kick off the launch of a smart-beta family with a small-cap-focused product, but IndexIQ Chief Investment Officer Salvatore Bruno indicates that was very deliberate on the part of the issuer.

“Given the current environment, there are a lot of crosscurrents going on that we think make it a particularly good time to have small-caps in a portfolio,” he said, citing rising long-term rates, heightened growth expectations and political uncertainty in Europe.

Bruno adds that small-caps are “more domestically oriented” and not as vulnerable to global crosscurrents or a strengthening U.S. dollar.  

A 20-Factor Model
The Chaikin Power Gauge is a multifactor model that uses a quantitative approach to target securities that are likely to outperform relative to their peers. It evaluates companies according to 20 factors that are divided evenly into four component buckets: value (weighted at 35%), growth (20%), technical (15%) and sentiment (30%). CSML’s underlying index uses the Chaikin Power Gauge to select its components from the market-cap-weighted Nasdaq US 1500 Index.

“These are the factors that successful active portfolio managers and institutional investors look at every day,” said Chaikin Analytics founder Marc Chaikin of the components incorporated into the Power Gauge metric.

“What we’ve done is to combine the factors that active managers use with some of the best of smart-beta passive investing,” he added in reference to CSML’s index.

Selection Criteria

To be selected, a component must be ranked in the top 10% among the parent index’s constituents or rank among the top 43% among the parent index’s constituents while having a price-to-sales ratio that falls within the lowest quintile among the parent index’s constituents, the prospectus said.

Typically, the index will have anywhere from 200 to 350 components, which are equal-weighted. In early April, CSML’s index had a market-capitalization range from $152 million to $4.2 billion, according to the prospectus.

Chaikin says he created the Chaikin Power Gauge after the 2008 financial collapse, and notes that the index underlying CSML has a three-year track record.

IndexIQ has filed for two more ETFs using methodologies based on the Chaikin Power Gauge: a large-cap fund and a dividend-focused fund.

Contact Heather Bell at [email protected].

 

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