IndexIQ Embracing New ETF Era

When IndexIQ entered the ETF space in 2009, it quickly became known for the exposure it offered investors to liquid alternatives strategies and other areas that had yet to see representation in the ETF space, such as global resources and small cap segments of foreign countries and key industries. The firm, which is known for the differentiated products it rolls out and the research underscoring every launch, was acquired by New York Life Management a few years ago. Now IndexIQ is setting out in new directions as it continues to find ways to provide differentiated products to investors. Today its offerings include 23 ETFs, with a total of $3.5 billion in assets under management. ETFR spoke with Chief Investment Officer Sal Bruno about what the firm is focusing on now and how it got where it is. 

Would you talk about IndexIQ’s evolution since it launched its first ETF, and how the New York Life deal affected the company?
The New York Life acquisition occurred in April 2015. Approximately seven or eight years before, we originally opened the doors for IndexIQ. It was founded on the premise of trying to democratize liquid alternatives, or alternative investments, and trying to deliver a sophisticated investment strategy in the ETF wrapper.

Some of our first work, in terms of our research, product launches and product development, was really focused around our alternatives suite, highlighted by the IQ Hedge Multi-Strategy Tracker ETF (QAI), which was our first ETF that came out and that was focused on hedge fund replication. It really helped to define the market for liquid alternative ETFs. It’s been one of the largest liquid alternative ETFs out there.

We followed that up in 2009 with other alternative products, notably the IQ Merger Arbitrage ETF (MNA) and the IQ Global Resources ETF (GRES). There were several other hedge fund replication strategy ETFs, things like global macro and market neutral.

Following what we think was a fairly successful endeavor to launch new products into a growing space, we reached about $1.5 billion in assets under management, and then decided to seek to partner with a larger firm that could help provide some distribution support and more resources to help us grow the firm additionally from there. We became the ETF platform in the liquid alternative arm of New York Life Investments.

We decided to start trying to move beyond just alternatives into some of the traditional asset classes. We didn’t really want to compete primarily in the regular beta arm of the marketplace, but rather to focus more on delivering innovative solutions, both in equity and fixed income.

We started doing some work on looking into the fixed income side by using smart beta or factor-type solutions.

We’re really trying to capture that innovative spirit and deliver not only across alternatives, but within equities and fixed income as part of the New York Life organization.

Recently, MNA usurped QAI in terms of size (AUM), displacing it as the largest IndexIQ ETF. Does that indicate investor interest in the alternative markets has shifted focus?
The interest in MNA has been strong—not just this year, but the prior two years. If you go back and look at 2017 and 2018, MNA doubled in assets in 2017 and in 2018. So coming out of 2016, we were sitting somewhere around $140 million. And now we’re just south of $1 billion. A lot of it really has to do with the profile that MNA has put up.

Returns have been very consistent—3-4% returns—which have been generated largely by differentiated exposure. It’s really been uncorrelated with the equity market. And merger-arbitrage strategies in general—not just our ETF—tend to have a low to negative correlation to fixed income, so investors found it somewhat useful as a potential hedge against rising rates, when rising rates were kind of on everybody’s mind in 2017 into late 2018.

With QAI, I don’t know if it’s been so much of a shift, as there are some other things going on. We saw money come into the fund in late 2018. We’ve seen this for the last several years. Firms tend to use QAI because of its size, and because of its liquidity, they can use it for a tax-loss-harvest-type position. That’s been some of the money we’ve seen coming out.

IndexIQ is very judicious about when it launches. Do you have a standard process for bringing a product to market?
We don’t. It can go down a couple of different avenues. Increasingly, we’re trying to tap into some of the resources that exist within New York Life, especially being a life insurance company with tremendous capabilities of managing fixed income investments.

For example, we’ve brought out two active muni bond ETFs leveraging the MacKay Shields relationship [the IQ MacKay Municipal Insured ETF (MMIN) and the IQ MacKay Municipal Intermediate ETF (MMIT)]. MacKay Shields is a boutique investment firm that’s part of New York Life Investments. We’ve been able to capitalize using some of their expertise to bring out an intermediate-term muni bond and an insured muni bond ETF, which are being well-received in the marketplace.

How is the firm looking to differentiate itself going forward?
On the alternative sides, we have good market share. We have a competitive and compelling product lineup. Part of what we’re trying to do is expand that offering with additional products, and raise the profile of some of the strategies that’ve been out there, that’ve generated some very attractive track records from a performance standpoint, but haven’t gathered as much in the way of investor assets.

On the fixed income side, again, we’re trying to differentiate by saying we’re part of a $500 billion global asset management company that has this huge pool of assets it manages, and we want to be able to tap into those resources.

When you have a diversified lineup like we do, one of the benefits is that it’s like having a diversified portfolio. Not everything should be going up or down at the same time. Last year was a really good year for MNA on a relative basis. The equity markets were down. The fourth quarter was particularly challenging. And MNA actually did a really good job. This year, MNA is sort of flat, and QAI has kind of picked up the mantle.

We’ve tried to develop our lineup to have different things available and working at different points in time. From that standpoint, we think the lineup is actually fairly strong the way it’s built. We’re always looking to continue to bolster that and add additional product that can help provide a better tool set for clients.