Hedge Rate Risk with a Multi-Strategy ETF
With yields on Treasuries ticking higher, investors who are concerned about higher interest rates can utilize a multi-strategy exchange traded fund as a fixed-income alternative.
For instance, the IQ Hedge Multi-Strategy ETF (NYSEArca: QAI ) provides a diversified mix of alternative strategies, including multiple hedge fund investment styles, such as long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets.
“QAI may also serve as a hedge for your portfolio during rising rate environments as the Fund’s historical low correlation to bonds has resulted in outperformance during rising rate environments,” according to an Index IQ note.
Looking at back-tested historical data during 11 different rising rate periods, QAI’s strategy has outperformed the Barclays U.S. Aggregate Bond Index in all of those periods. The ETF is able to rebalance its exposure across the broad hedge fund strategies in response to the changing market conditions.
This type of ETF provides retail investors with hedge fund-esque strategies, without the costs associated with hedge funds. QAI, for instance, tries to reflect the performance of a customized index that tracks the risk-adjusted return characteristics of hedge funds and comes with a 0.91% expense ratio. The ETF also recently crossed over $1.0 billion in assets under management. [Hire Your Own Hedge Fund With This ETF]
Currently, QAI is heavily titled toward short-term debt, with top components including a 23.7% position in mixed short-term bonds 19% in short-term Treasuries. The ETF is built like a fund-of-funds, with top holdings including Vanguard Total Bond Market ETF (BND) , Vanguard Short-Term Bond ETF (BSV) , iShares 1-3 Year Treasury Bond ETF (SHY) and iShares Short Treasury Bond ETF (SHV) .
However, investors should be aware that the ETF does not solely invest in fixed-income assets. QAI’s current holdings also include a spattering of currencies, emerging market small-caps, developed EAFE small-caps, real estate investment trusts and some U.S. stocks.
Potential investors should be aware that these types of alternative investments are not meant as growth strategies to generate outsized returns in their portfolios. In reality, these strategies are doing exactly what they were made for, diminishing volatility. Consequently, in bullish market conditions, the strategies may underperform, but if the markets turn, this type of alternative strategy can shine. [Hedge Market Risks with Alternative Investments, ETFs]
For more information on index strategies, visit our indexing category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
