IndexIQ, the firm behind some of the first hedge fund replication ETFs, expanded its lineup last week with the debut of another product designed to deliver low volatility and low correlations to traditional asset classes. The IQ Hedge Market Neutral Tracker ETF (QMN) will seek to replicate an index that consists of both long and short positions in asset classes while minimizing exposure to systematic risk.

The new fund could have appeal to investors looking to reduce risk in anticipation of a choppy market, or simply to smooth out overall portfolio volatility over a longer period of time. “Market Neutral is one of the largest hedge fund investment styles, both in terms of the number of funds and in the amount of assets being put to work,” said Adam Patti, IndexIQ CEO. “After incubating the index underlying QMN for four years, we felt it was an excellent time to roll out this strategy, particularly given the volatility and uncertainty inherent in today’s market environment.”

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Under The Hood

To start, QMN will be concentrated in short-term Treasuries; Vanguard’s Short Term Bond ETF (BSV) and iShares’ 1-3 Year Treasury Fund (SHY) combing to make up close to 50% of the overall portfolio. Other ETFs in the QMN portfolio include total bond market fund (both AGG and BND) as well as ETFs offering exposure to the EAFE region (EFA), high yield bonds (HYG), convertible securities (CWB), and emerging markets (VWO).

Limiting Downside Risk

The primary appeal of a product such as QMN should lie in the ability to limit downside risk in turbulent environments. Though the ETF is brand new, the underlying index has been around for several years. That sheds some light on the volatility that can be expected, which is perhaps most useful when compared to a broad-based stock index such as the S&P 500 (drawdown measures the largest decline between any two points in the history of the indexes, while the recovery date indicates the point at which all of the index’s returns had been recovered):

According to the QMN fact sheet, the underlying index has returned about 4.5% annually over the past three years.

QMN will charge a management fee of 0.75%. Including the acquired fund fees, the “all in” expense ratio is just under 1%.

Disclosure: No positions at time of writing.

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