By Salvatore J. Bruno; Chief Investment Officer and Managing Director for IndexIQ
After what had been a tumultuous 2019, the end of the year is bringing significant progress on a number of fronts that have had investors on edge for months. As the year came to a close, we saw:
- Bipartisan agreement on the U.S.-Mexico-Canada trade agreement commonly referred to as USMCA;
- Phase one of a U.S./China trade deal;
- Strong jobs report numbers;
- Greater clarity on the Fed’s outlook;
- Passage of a $738 billion military spending bill; and
- A landslide UK election that makes a 2020 Brexit all but certain.
All of this has us generally positive on what’s in store for investors next year. In fact, if gross domestic product growth (GDP) bottoms out at 1% and starts to reaccelerate, we will look back on the start of 2020 with 20/20 hindsight as being the soft landing many have been looking for over the past several years. Instead of being late in the current cycle, we may very well have just kicked off a brand new one.
Still, risks remain and even amidst all these bright spots, we think it’s very likely 2020 will see a dramatic uptick in volatility, driven largely by what will be a rancorous U.S. presidential election. With that in mind, we’ve put together three strategies to help investors navigate the coming year.
2020 ETF Strategy #1: Follow the “smart money” to liquid alternatives
Though the long-term trend lines might look calm, the day-to-day is going to get bumpy next year. Numerous institutional investors are already using liquid alternatives for their volatility dampening properties to smooth out market gyrations. In fact, according to a recent study from Greenwich Associates commissioned by IndexIQ, (read the full study here), institutional allocations to liquid alternative ETFs will rise from $47 billion to $114 billion over the course of the next 12 months. There’s wisdom in this crowd, and investors may want to consider the potential diversification benefits of liquid alternatives for their own portfolios.
IndexIQ solutions to consider:
2020 Strategy #2: Get active in fixed income
Interest rates are at painfully low levels and unlikely to budge anytime soon. If they haven’t already, 2020 will be the time for ETF investors to get active with their fixed income exposures, or, at the very least, to move beyond traditional market cap-weighted approaches that will continue to eke out paltry yields.
There has been an explosion of unique factor-based bond ETF approaches to come to market recently, as well as a growing contingent of best-in-class active managers who have started to make their strategies available to investors in an ETF wrapper. There’s really no need to settle for returns that mimic the “Agg” when so many compelling options are now available.
IndexIQ solutions to consider:
- IQ S&P 500 High Yield Low Volatility ETF (HYLV)
- IQ MacKay Insured Municipal ETF (MMIN)
- IQ Ultra Short Duration ETF (ULTR)
2020 Strategy #3: Dust off your passport and go international
Investors have had compelling reasons to stay close to home the past few years. But now, with greater clarity emerging around Brexit and movement on a China/U.S. trade deal, it’s time for investors to broaden their horizons and consider upping their international equity exposure.
However, though some risks may have lessened, currency risk never really goes away. So even as investors are taking a fresh look outside the U.S., they should do so with an eye on effective strategies to hedge currency risk from their international equity exposures.
IndexIQ solution to consider:
We look forward to speaking with all of our clients, colleagues and friends as the new year unfolds.
There are risks involved with investing in any such products, including the possible loss of principal. Investors in the Funds should be willing to accept a high degree of volatility and the possibility of significant losses.
Click on the fund name for the most current fund page, which includes, the prospectus, investment objectives, performance, risk, and other important information. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Visit nylinvestments.com/etfs for the most recent month-end performance. https://www.nylinvestments.com/IQetfs/etfs
Before considering an investment in the Fund, you should understand that you could lose money.
QAI: The Fund’s investment performance, because it is a fund of funds, depends on the investment performance of the underlying ETFs in which it invests. There is no guarantee that the Fund itself, or any of the ETFs in the Fund’s portfolio, will perform exactly as its underlying index. The Fund’s underlying ETFs invest in: foreign securities, which are subject to interest rate, currency exchange rate, economic, and political risks. These risks may be greater for emerging markets. Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Leverage, including borrowing, will cause some of the Fund’s underlying ETFs to be more volatile than if the underlying ETFs had not been leveraged. The Fund may experience a portfolio turnover rate of over 100% that will increase transaction costs and may generate short-term capital gains which are taxable.
MNA: Certain of the proposed takeover transactions in which the Fund invests may be renegotiated, terminated or involve a longer time frame than originally contemplated, which may negatively impact the Fund’s returns. The Fund’s investment strategy may result in high portfolio turnover, which, in turn, may result in increased transaction costs to the Fund and lower total returns. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. These risks may be greater for emerging markets. Diversification does not eliminate the risk of experiencing investment losses. Stock prices of mid- and small-capitalization companies generally are more volatile than those of larger companies and also more vulnerable than those of larger capitalization companies to adverse economic developments. The Fund is non-diversified and is susceptible to greater losses if a single portfolio investment declines than would a diversified fund. The ETF should be considered a speculative investment with a high degree of risk, does not represent a complete investment program and is not suitable for all investors. The Fund may experience a portfolio turnover rate of over 100% that will increase transaction costs and may generate short-term capital gains which are taxable.
HYLV: Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. Securities rated below investment grade are commonly referred to as “junk bonds.” In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Bonds are also subject to credit risk, which is the possibility that the bond issuer may fail to pay interest and principal in a timely manner. The Underlying Index seeks to provide exposure to U.S. dollar-denominated high yield corporate bonds that are measured to have less credit risk based on their Marginal Contribution to Risk. As with any measure of a bond’s credit risk, Marginal Contribution to Risk may fail to accurately reflect the credit risk of an individual bond. In addition, Marginal Contribution to Risk is not predictive of the price performance of fixed income securities. There is no guarantee that the construction methodology of the Underlying Index will accurately provide exposure to U.S. dollar denominated high yield corporate bonds with lower credit risk.
To the extent that the Underlying Index is concentrated in a particular industry, the Fund also will be concentrated in that industry. Concentrated Fund investments will subject the Fund to a greater risk of loss as a result of adverse economic, business, or other developments than if its investments were diversified across different industry sectors. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. These risks may be greater for emerging markets.
The “S&P U.S. High Yield Low Volatility Corporate Bond Index” is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”) and has been licensed for use by IndexIQ Advisors LLC. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by IndexIQ Advisors LLC. IQ S&P High Yield Low Volatility Bond ETF is not sponsored, endorsed, sold, or promoted by SPDJI, Dow Jones, S&P, and their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s), nor do they have any liability for any errors, omissions, or interruptions of the S&P U.S. High Yield Low Volatility Corporate Bond Index.
MMIN: The Fund may be susceptible to an increased risk of loss, including losses due to adverse events that affect the Fund’s investments more than the market as a whole, to the extent that the Fund’s investments are concentrated in the securities of a particular issuer or issuers, region, market, industry, group of industries, project types, group of project types, sector or asset class. Municipal Bond risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers, and the possibility of future tax and legislative changes, which could affect the market for and value of municipal securities. Fixed income securities most frequently trade in institutional round lot size transactions. Until the Fund grows significantly in size, the Fund expects to purchase a significant number of bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots. Odd lot size positions may have more price volatility than institutional round lot size positions. Insured Municipal Bonds are covered by insurance policies that guarantee the timely payment of principal and interest. The insurance does not guarantee the market value of an insured security, or the Fund’s share price or distributions, and shares of the Fund are not insured. The Fund may purchase insurance for an uninsured bond directly from a qualified Municipal Bond insurer. The supply of insured municipal securities which meet the Fund’s investment guidelines is limited. A portion of the Fund’s income may be subject to state and local taxes or the alternative minimum tax. Funds that invest in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which the bond issuer may fail to pay interest and principal in a timely manner. Municipal bond risks include the ability of the issuer to repay the obligation, the relative lack of information about certain issuers, and the possibility of future tax and legislative changes, which could affect the market for and value of municipal securities.
ULTR: Investors should not expect the Fund’s returns to track the returns of any index or market for any period of time. The Fund is a new fund. As a new fund, there can be no assurance that it will grow to or maintain an economically viable size, in which case it could ultimately liquidate. The risks of investing in debt or fixed-income securities include (without limitation): credit risk, maturity risk, market risk, interest rate risk and call risk. Interest rates in the United States are near historic lows, and the Fund currently faces a heightened level of interest rate risk. To the extent the Federal Reserve Board continues to raise the federal fund rates, there is a risk that interest rates across the financial system may rise, possibly significantly and/or rapidly. Rising interest rates or lack of market participants may lead to decreased liquidity and increased volatility in the fixed-income or debt markets, making it more difficult for the Fund to sell its fixed-income or debt holdings at a time when the Subadvisor might wish to sell. Decreased liquidity in the fixed-income or debt markets also may make it more difficult to value some or all of the Fund’s fixed-income or debt holdings. When the Fund invests in foreign markets, it will be subject to risk of loss not typically associated with domestic markets. Loss may result because of less foreign government regulation, less public information and less economic, political and social stability. Loss may also result from the imposition of exchange controls, confiscations and other governmental restrictions.
Fund shares are not individually redeemable and will be issued and redeemed at their NAV only through certain authorized broker-dealers in large, specified blocks of shares called “creation units” and otherwise can be bought and sold only through exchange trading. Creation units are issued and redeemed principaly in-kind.
HFXI: The Fund will invest in securities denominated in currencies other than U.S. dollars (foreign currencies) and much of the income received by the Fund will be in foreign currencies, but the Underlying Index and the Fund’s NAV will be calculated in U.S. dollars. Furthermore, the Fund may convert cash in U.S. dollars to foreign currencies to purchase securities. Both the Fund’s ability to track the Underlying Index and Fund returns in general may be adversely impacted by changes in currency exchange rates, which can occur quickly and without warning.
The Fund uses various strategies to attempt to reduce the impact of changes in the value of a foreign currency against the U.S. dollar. These strategies may not be successful. Derivatives are investments whose value depends on (or is derived from) the value of an underlying instrument, such as a security, asset, reference rate or index. Derivatives may be difficult to sell, unwind or value. The use of a derivative may be more volatile than the underlying direct investment. The Fund invests in the securities of non-U.S. issuers, which securities involve risks beyond those associated with investments in U.S. securities. The performance of the Underlying Index and the Fund may deviate from that of the markets the Underlying Index seeks to track due to changes that are reflected in the sector more quickly than the quarterly rebalancing process can track. Securities in the Underlying Index or in the Fund’s portfolio may also underperform in comparison to the general securities markets. The strategy used by the Advisor to match the performance of the Underlying Index may fail to produce the intended results. Mid capitalization companies are generally less established and their stocks may be more volatile and less liquid than the securities of larger companies. All rights in the FTSE Developed ex North America 50% Hedged to the USD Index (the “Index”) vest in FTSE International Limited (“FTSE”). “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE under license. The IQ 50 Percent Hedged FTSE International ETF (the “Fund”) has been developed solely by IndexIQ Advisors LLC. The Index is calculated by FTSE or its agent. FTSE and its licensors are not connected to and do not sponsor, advise, recommend, endorse, or promote the Fund and do not accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b) investment in or operation of the Fund. FTSE makes no claim, prediction, warranty, or representation either as to the results to be obtained from the Fund or the suitability of the Index for the purposes to which it is being put by the Fund. The Underlying Index is sponsored by an organization (the “Index Provider”) that is independent of the Fund and Advisor. The Index Provider determines the composition and relative weightings of the securities in the Underlying Index and publishes information regarding the market value of the Underlying Index. The Fund’s Index Provider is FTSE, a widely known global index provider that currently manages and calculates more than 120,000 indexes daily.
The data reported in this document reflect solely the views reported to Greenwich Associates by the research participants. Interviewees may be asked about their use of and demand for financial products and services and about investment practices in relevant financial markets. Greenwich Associates compiles the data received, conducts statistical analysis and reviews for presentation purposes in order to produce the final results. Unless otherwise indicated, any opinions or market observations made are strictly our own
Greenwich Associates is not affiliated with New York Life Insurance Company or any of its subsidiaries.
The information contained herein is general in nature and is provided solely for educational and informational purposes. New York Life does not provide legal, accounting or tax advice. You should obtain advice specific to your circumstances from your own legal, accounting and tax advisors.
Consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus and the statement of additional information include this and other relevant information about the Fund and are available by visiting nylinvestments.com/etfs or calling 888-474-7725. Read the prospectus carefully before investing.
“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.
Not FDIC/NCUA Insured. Not a Deposit. May Lose Value. No Bank Guarantee. Not Insured by Any Government Agency.