IndexIQ has expanded its ETF product lineup with the launch of three new equity-focused strategies.
The new trio of funds — the IQ U.S. Large Cap R&D Leaders ETF (LRND), the IQ U.S. Mid Cap R&D Leaders ETF (MRND), and the IQ Global Equity R&D Leaders ETF (WRND) — launched on the NYSE on February 8.
The funds are designed to offer exposure to domestic and global companies that are consistently reinvesting into their research and development activities, positioning themselves for future innovations and the expansion of existing capabilities.
“One way to objectively select these types of companies is to look at how much they are spending on Research & Development,” Sal Bruno, chief investment officer with IndexIQ, said. “This methodology has an advantage in that it does not overweight companies just because they have performed well.”
Weighting securities based on reported R&D may be more stable than prices that rely on forward-looking estimates, allowing the fund to provide a truer estimate of the optimal weight based on actual fundamentals, not market hype, according to Bruno.
This can be beneficial when individual companies or even entire sectors come under pressure and market cap growth indexes are selling off, Bruno said.
Advisors should consider these new ETFs as possible alternatives to their growth holdings, Bruno said.
LRND, MRND, and WRND seek to track the price and yield performance of the IQ U.S. Large Cap R&D Leaders Index, the IQ U.S. Mid Cap R&D Leaders Index, and the IQ Global Equity R&D Leaders Index, respectively.
The universe of eligible securities begins with the Russell 1000 Index for the index underpinning LRND, the Russell Midcap Index for the index underpinning MRND, and the FTSE All-World Index for the index underpinning WRND, according to regulatory filings.
From there, the U.S.-focused portfolios are narrowed down to include the top 100 equities based on R&D reinvestment, while the global portfolio includes the top 200 such equities. Portfolios are then weighted based on R&D reinvestment, according to regulatory filings.
“Most growth investors are speculating about future growth prospects, often by extrapolating historical growth trends. This is very subjective and may lead to situations where stocks have a price reinforcement mechanism whereby they get higher weights in a market cap weighted index because their price has risen, sometimes without regard to actual future growth,” Bruno said. “This may lead to situations where stocks that miss an earnings estimate could have excessive downside risk.”
The indexes that the R&D ETFs track currently have lower technology weight, helping them to outperform during periods of stress such as inflationary and rising rate environments, according to Bruno.
“We see that the types of names in the indices of the R&D ETFs tend to have lower beta (or market sensitivity). Thus we have seen the R&D indices have smaller drawdowns than their cap weighted benchmarks,” Bruno said.
LRND, MRND, and WRND carry expense ratios of 16 basis points, 14 basis points, and 18 basis points, respectively.
The three new ETFs are managed by an investment team comprising Greg Barrato and James Harrison.
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