IndexIQ launched today a new ETF offering a wrinkle on the rapidly expanding market for equity-based commodity ETFs.
The IQ ARB Global Resources ETF (NYSEArca: GRES) bills itself as the first global resources hedged ETF. The fund is designed to tackle two common issues with equities-based commodities ETFs: the usual heavy focus on energy and the higher correlation to equities rather than commodities values.
To do that, GRES will track a new index that starts off with an equal-weighted position in eight commodity sectors: energy, industrial metals, precious metals, food and fiber, livestock, timber, water and coal.
Through a rules-based process, the sectors are then underweighted or overweighted monthly in a sector rotation strategy that looks at the valuation and the price momentum in each sector. That's a departure from the traditional production and market capitalization focus alone.
“That way we don’t end up just following energy,” said IndexIQ CEO Adam Patti. “We make the broadness of these natural resources ETFs even broader. “
GRES’ closest competitors—Market Vectors RVE Hard Assets Producers ETF (NYSEArca: HAP) and Thomson Reuters/Jefferies CRB Global Commodity Equity Index Fund (NYSEArca: CRBQ)—both provide a strong focus in energy.
HAP’s portfolio was some 41 percent allocated to energy in September; CRBQ’s was 39 percent.
A classic "natural resources" fund like the iShares North America Natural Resources ETF (NYSEArca: IGE) is 80 percent allocated to energy.
By contrast, GRES' energy exposure stands at 9.6 percent.
GRES also aims to lower the correlation of the fund to the equities market by “shorting out the risk factor through the MSCI EAFE and S&P 500 indexes,” Patti said.
To do that, the fund at launch held significant positions in the ProShares Ultrashort S&P 500 (NYSEArca: SDS) and ProShares UltraShort MSCI EAFE (NYSEArca: EFU) ETFs, two ETFs designed to deliver -200 percent of the daily return of their respective indexes. But Patti says the fund will transition out of those positions on Friday and, going forward, will use only futures to gain exposure to the market.
“We are isolating the risk premium to the commodities sector,” Patti said, adding that the short risk strategy allows investors to have a more diversified, less-equities-correlated exposure to commodities.
“We are increasing the correlation to commodities and decreasing volatility,” said Patti.
Of course, it will also cap the upside of the fund. Based on current levels, the fund is only net long about 73 percent of its portfolio.
|GRES Top 10 Holdings – October 26|
|SUMITOMO METAL MINING CO||6.67%|
|PROSHARES ULTRASHORT S&P500||4.66%|
|PROSHARES ULTRASHORT MSCI EAFE||4.55%|
|BARRICK GOLD CORP||4.49%|
|AJINOMOTO CO INC||3.66%|
|NISSAN FOOD HOLDINGS CO LTD||2.58%|
|SUEZ ENVIRONNEMENT SA||2.43%|
Source: IndexIQ. Data as of Oct. 26.
Patti said investors have been seeking diversification and inflation hedging through commodities but have been concerned about the asset class given the CFTC’s ongoing quest to regulate the derivatives space more tightly. Demand for equities-based commodities products is on the rise.
Year-to-date, the IQ ARB Global Resources Index has tallied returns of 12.67 percent.
GRES' expense ratio is pegged at 0.75 percent.
IndexIQ also launched this week the IQ CPI Inflation Hedged ETF (NYSEArca: CPI). You can read that story here.
You can read the GRES prospectus here.