IndexIQ Unveils Inflation-Hedged ETFs

• Trang Ho
• On 6:01 pm EDT, Wednesday October 28, 2009

Undeterred by tepid response to its first two offerings, IndexIQ has rolled out two more ETFs with hedging strategies: IQ CPI Inflation Hedged ETF (AMEX:CPI - News)and IQ ARB Global Resources ETF .

IQ CPI aims to offer solace to those worried about inflation. The Bureau of Labor Statistics comes up with the CPI by crunching cost of goods, services and housing numbers from about 23,000 retailers and service providers and 50,000 landlords or tenants. The data cover 87 urban areas across the country.

The ETF of ETFs can include any combination of equity, fixed income, commodities, currencies and real estate, inverse and leveraged ETFs.

Holdings are selected by a quantitative model. It's designed to provide the return of the CPI, as measured by the consumer price index on a rolling 12-month period, plus a real return of 2% to 3%.

"The goal is to provide those returns with low volatility and hopefully with a high correlation to the CPI," said Adam Patti, CEO of IndexIQ.

The fund will rebalance every month when new CPI data are released. The 0.65% expense ratio includes a 0.45% management fee and 0.17% from the underlying ETFs.

Why would an investor want to buy the CPI ETF instead of Treasury inflation-protected securities, whose yield and underlying principal are automatically adjusted to inflation?

"TIPS were launched in 1997. So they've never been tested in an inflationary environment and they're fairly volatile," Patti said. "Since inception, TIPS have provided 30% to 40% correlation to inflation. It's not a good inflation proxy."

IQ CPI is currently 91% weighted in bonds, followed by gold at 7% and trace amounts of the yen and oil. "As inflation rears its ugly head, you'll see short-term bonds go down and higher-yielding assets classes go up," Patti said.

Some asset managers call the debut of an inflation-centered product ill-timed. Inflation won't rear its ugly head until wages increase, says Robert Stein, managing partner of Astor Financial, and that's not likely to happen soon with the high rate of unemployment.

"TIPS are a better way to hedge inflation because you're not relying on someone's model," Stein said. "Their way of hedging inflation is not any better than a buy-and-hold approach."

IQ ARB Global Resources Index includes 99 companies that engage in the production of livestock, metals, grains, energy, timber, water and coal. Holdings are screened from eight sectors based on price action and valuation.

"We have a dynamic weighting that's designed to achieve outperformance by finding sectors that are undervalued but have price momentum," Patti said.

The ETF seems similar to Market Vectors RVE Hard Asset Producers ETF (NYSEArca:HAP - News) or iShares S&P North American Natural Resources (NYSEArca:IGE - News), says Gary Gordon, president of Pacific Park Financial. "They merely create a new way to pick stocks that they like with unique rebalancing and weighting rules, and then call those stocks an index," he said.

Patti contends that his fund is better than existing broad-based commodity ETFs because it's not overweighted in energy and is hedged with 20% short exposure to the S&P 500 and MSCI EAFA indexes, "which reduces correlation and volatility."

The fund rebalances monthly and has an expense ratio of 0.75%.

ALPS' Commodity-Based ETFs

Coincidentally Tuesday, ALPS ETF Trust released two equity-based commodity ETFs: Jefferies TR/J CRB Global Agriculture Equity Index Fund and Jefferies TR/J CRB Global Industrial Metals Equity Index Fund .

CRBA holds 35 companies engaged in producing seeds, genetically modified foods, chemicals, fertilizers, livestock, farm and irrigation equipment. Companies must get at least half of their revenue from agriculture and have a minimum market cap of $750 million. The fund will rebalance quarterly.

It will compete against Market Vectors Agribusiness ETF (NYSEArca:MOO - News), with its $1.6 billion in assets, and PowerShares Global Agriculture ETF (NasdaqGM:PAGG - News).

CRBI includes 35 global companies engaged in the production and distribution of aluminum, copper, iron ore, nickel, steel and other metals. Companies must also have a minimum market cap of $750 million and get at least half their revenue from metals. It uses a modified market-cap weighting system.

The ETF will compete with Market Vectors Gold Miners (NYSEArca:GDX - News), Market Vectors Steel (NYSEArca:SLX - News) and SPDR S&P Metals & Mining (NYSEArca:XME - News).

Both funds carry 0.65% expense ratios.

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