Index IQ to Close 3 Funds

IndexIQ, creator of the first hedge fund replication ETFs, plans to close three of its international equity ETFs by year end. The three funds have combined assets of about $5 million, or about 1% of Index IQ’s total assets.

Friday, Dec. 31 will be the last day of trading for the IQ Taiwan Small Cap ETF (TWON), IQ Hong Kong Small Cap ETF (HKK) and the IQ Japan Mid Cap ETF (RSUN). All three funds were less than a year old.

Shareholders who don’t sell their shares by Friday will have their shares automatically redeemed on Dec. 30. Shareholders who don’t sell by this date will not incur transaction fees in connection with the liquidation. Index IQ will pay all the costs.

Elsewhere in ETFLand:

WisdomTree ETFs declare quarterly distributions. The Dividend ex-Financials Fund (DTN) tops the list with an actual payout of 47 cents per share. LargeCap Dividend (DLN) and Asia Pacific ex-Japan (AXJL) show and place with 39 cents and 38.4 cents, respectively. Equity Income (DHS) follows closely with 38.0 cents. Most International funds don’t post dividends this quarter.

Financial Times says in 2011 British ETF investors flocked to fixed income and strategies that provide insurance should equities take a dive. Emerging market ETFs holding either stocks or bonds saw a lot of inflows as did gold mining stock ETFs, such as Market Vectors Gold Miners (GDX).

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ETF May Benefit from End of Ethanol Subsidies

Investors looking for a way to capitalize on the U.S. Senate’s vote Thursday to end the ethanol tax subsidies should take a look at the IQ Global Agribusiness Small Cap ETF (CROP).

The amendment, which passed 73-27, would not only end the 43-cent-a gallon tax credit paid to oil refiners for corn ethanol, but also eliminated the 54-cent-a-gallon tariff on imported ethanol from countries such as Brazil and Spain. About 75% of the ETF’s holdings are outside the U.S.

The ETF, which launched March 22, tracks a float-adjusted market cap-weighted index holding agribusiness companies, including those in crop production and farming, livestock operations, agricultural machinery, agricultural supplies and logistics, agricultural chemicals, and biofuels.

Adam Patti, the chief executive of Index IQ, said the ETF would see numerous benefits from passage of the bill. “While we would expect the legislation to be a net negative for domestic ethanol and fertilizer companies, which CROPS own very few of, livestock and foreign ethanol firms likely would benefit, and CROP owns more of these.”

“In addition to livestock and foreign ethanol firms potentially benefitting from the legislation, we expect CROP to benefit additionally by several other factors, including rising food prices, global supply shortages, changing dietary demands in emerging markets, and growing population,” said Patti.

He added CROP does not issue Schedule K-1 tax forms to investors, while many other commodities/resources funds do.

The fund closed up 1.3% on Friday.

Does Hedge Fund Replication Work?

Just days after the stock market hit its March 2009 bottom, IndexIQ, a tiny index provider, launched its first exchange-traded fund, the IQ Hedge Multi-Strategy Tracker ETF (QAI). As far as attracting investors, the timing proved inauspicious. Most investors were shellshocked after witnessing the stock market plummet more than 50 percent in 18 months. However, inside the ETF industry, the fund’s hedge fund replication strategy drew much interest. In April, the ETF won Most Innovative ETF and its eponymous index won Most Innovative Index at the 9th Annual Closed-End Funds & Global ETFs Forum, the first time a single firm won awards in both categories.

It’s no wonder. Hedge funds are sexy. These aggressively managed portfolios use sophisticated strategies to generate market-beating returns, otherwise known as alpha. Also, they’re very exclusive. Called “mutual funds for the super rich” by Investopedia, hedge fund investors need to be accredited. This means investors must not only be knowledgeable, but they must have a net worth greater than $1 million and make a certain amount of money. Unlike mutual funds, hedge funds aren’t regulated, so they have the flexibility to invest in many kinds of assets.

Hedge fund ETFs like QAI were supposed to solve all that. Democratize the space. Lower costs. Increase transparency.

It was “hedge funds for the rest of us.”

But do they deliver?

Now that the IQ Hedge Multi-Strategy Tracker and its brother, the IQ Hedge Macro Tracker ETF (MCRO), have passed their first birthdays, it’s possible to perform data comparisons to see if they actually deliver. Do these funds provide the pattern of returns that investors want when accessing the hedge fund space?

The first thing one needs to know is that, contrary to conventional wisdom, hedge fund ETFs aren’t charged with maximizing return on investment. They follow the strategy of the original hedge funds, reducing risk and minimizing losses by shorting and holding a combination of asset classes not correlated to the broad market. Of course, reducing risk means dampening potential profits, which means when the S&P 500 Index goes straight up on a bull rally, hedge fund ETFs will lag the market’s returns.

And that’s exactly what happened for the 12 months ending June 30: When the S&P 500 leapt 14.4 percent, the IQ Hedge Multi-Strategy Tracker inched up 2.2 percent and the IQ Hedge Macro Tracker gained 3.9 percent.

“Nothing is designed to shoot the lights out,” said Adam Patti, chief executive officer at IndexIQ. “I look at stress periods in the market as where hedge funds should be doing well.”

The hedge worked during the second quarter of 2010 when the S&P 500 tumbled 11.4 percent into a market correction. QAI slid 2.6 percent and MCRO lost just 2.1 percent. The ETFs also reduced volatility for the six months ended June 30. The S&P fell 6.7 percent during that period, while the QAI and MCRO posted negative returns of 2.5 percent and 2.3 percent, respectively.

“They are trying to produce a return pattern of the average hedge fund,” said Kevin Malone, president of Greenrock Research, a Chicago research firm. “The reason to consider this is to get a return pattern different from stocks and bonds; better than bonds but not as good as stocks.”

Originally published in ETF Report. For the full story click here.