IndexIQ has brought to market two ETFs in partnership with stock market expert Marc Chaikin. The IQ Chaikin U.S. Small Cap ETF (CSML) and the IQ Chaikin U.S. Large Cap ETF (CLRG) each offer equal-weighted portfolios of stocks selected based on the “Chaikin Power Gauge,” which uses more than 20 metrics within four buckets—value, growth, technical and momentum. These multifactor ETFs are among the fastest-growing ETFs on the market these days. IndexIQ’s Chief Investment Officer Sal Bruno gives us a quick rundown of what sets these strategies apart, and how
ETF.com: The two Chaikin ETFs use more than 20 fundamental and technical metrics to select securities—they even look at sentiment as a metric. Why does IndexIQ think this approach to equities makes sense, and how do you use these ETFs?
Sal Bruno: It's important for investors to think about how they get their exposure to the equity market. We see a great opportunity to bridge the gap between active and passive. When we were looking around for products, we came across the Chaikin Nasdaq indices, which basically take the Chaikin Power Gauge and overlays it on top of an existing Nasdaq index with large-cap and small-cap stocks.
What we found most appealing about the Chaikin products and the Power Gauge is their ability to systematically capture how managers think about securities. It really embeds a lot of the intelligence of active managers over time, but systematizes it.
It includes things like value and growth, which is important for any model to include. But by including sentiment and technical factors, it gives you a 360-degree view of the securities from all major stakeholders.
We were attracted to this four-bucket approach—value, growth, technical and sentiment—because it’s, again, a great way to bridge the gap between active and passive.
ETF.com: How reliable is sentiment as a factor? It would seem to be inconsistent. How does that impact turnover?
Bruno: One of the great things about this is it's a passive index, so it's only rebalanced and reconstituted once a year. Securities are selected according to the methodology every April, and they're sent back to equal weighting at the beginning of the year.
What's interesting is, because it's only once a year, the weights tend to drift over time, creating this shadow momentum effect. We just rebalanced at the beginning of April, and two-and-a-half months later, we're already seeing winners starting to separate themselves from the pack.
That's one way of thinking about “sentiment”—as that shadow momentum that's getting embedded in the weights throughout the year.
ETF.com: Why should investors see these smart-beta ETFs as better than all the other U.S. large-cap and small-cap ETFs out there?
Bruno: Because it's not just quantitatively driven. It’s based on the 50-plus years of experience Mark Chaikin has working with institutional equity managers, picking their brains on what they look at, and systematizing it. It’s not just a whole bunch of factors that we backtested together, but it has great fundamental underpinning.
ETF.com: Smart beta doesn’t mean outperformance, and in fact, many underperform market-cap vanilla approaches over time. Still, a lot of investors look at smart-beta ETFs for outperformance. Is that a hurdle when you talk to advisors about these funds?
Bruno: It is a hurdle, because the default option is just buy cheap equity beta for a very low price. There's definitely a performance hurdle there. But multifactor products should be an improvement over simple market cap in one of at least three different metrics: outperformance, lower volatility or more income—or some combination of them.
Chart courtesy of StockCharts.com
ETF.com: The small-cap CSML has more than $510 million in assets; CLRG has $445 million. They’re both still relatively new to market. Were they bespoke products, or are they just resonating with investors?
Bruno: We got into the market in May 2017 with the small-cap ETF, December 2017 with the large-cap. They've been very successful. We did a big road show at the end of last summer for the small-cap ETF—CSML—and found clients were interested.
A lot of it was external third-party money, which was great. We also had the benefit of having asset allocation funds that are run within the MainStay Investments umbrella that allocated to these strategies.
So, it's not all seed or bespoke money. It's actually mutual fund assets from an asset allocation perspective that have been directed towards these, and a big chunk, especially on the small-cap, has been driven by third-party clients.
Contact Cinthia Murphy at [email protected]