A few days ago I wrote somewhat critically about the IQ CPI Inflation Hedged ETF (CPI) and IQ Arb Global Resources ETF (GRES) and said I would try to listen on the conference call IndexIQ was hosting to explain the funds. I was able to get to the call and did learn a few things.
Regarding CPI I said I was baffled at the complete omission of any sort of TIPS product in favor of such a heavy weight to short term t-bills. I allowed that with stated inflation being so low that t-bills could work for now. They have done backtesting galore and the backtests have been successful. For the last year (I think have that time frame right) the index outperformed the reported CPI index by well over 200 basis points, pretty good given the objective.
For now the reported inflation environment is benign so the fund can be heavy in t-bills. At times of higher inflation the fund will allocate more to things like gold, oil and even equities and “real estate.” Presumably real estate means REIT ETFs. So the success of the fund will rely on correct assessment and timing of inflation trends. It would seem to me that if inflation kicks up and at the same time somehow the other things they would use to protect against inflation, based on past backtest success, went down that the concept would fall flat. That is not a prediction just the obvious threat.
The reason for no TIPS exposure is that it turns out that per their research TIPS have a very low correlation to the reported inflation rate which the CPI fund benchmarks against, I believe the number the cited for the correlation was 0.21. That is a low correlation but I don’t think correlation is relevant. If you buy an inflation protected security of some sort you expect the par value to ratchet up with the rate of reported inflation not to have the price of your holding move tightly with the rate of reported inflation but maybe I misunderstood that point. The other reason they cited for avoiding TIPS, which makes more sense is that longer dated TIPS are very sensitive to rising interest rates. If correct then it makes PIMCO’s Short Term TIPS ETF (STPZ) worth exploring.
As for the commodity fund, GRES, I was most baffled by the huge weighting to Sandvik, about 8% of the fund, and the dozens of stocks with microscopic weightings. I asked about this during the Q&A and I think I get; I’ll explain via a simplified (and made up) example. Lets say a fund like this only invests in two industries instead of the eight the GRES invest in. Lets say that the fund must equally weight the two industries like GRES does the eight. If one industry only had two stocks and the other had 100 then those two stocks would have 25% weightings while the stocks from the other industry would have tiny weightings. GRES has more moving parts but generally it is trying to equal weight eight different industries.
I’m still not crystal clear on why that leads to such small weightings in certain energy and mining stocks but the above explanation, assuming it makes any sense will get you started understanding it.
For some other follow ups;
The Oklahoma Exchange Traded Fund (OOK) is finally out. I am submitting an article to theStreet about it but on first glance it looks like an interesting energy proxy. One of the smaller holdings in OOK is LSB Industries (LXU) which makes heat pumps for geothermal of all things. It went down a ton during the bear market and is up a ton from the March low but the chart since the summer looks dreadful. The last two sentences is all I know about the stock.
A new farm name from a Seeking Alpha reader; MP Evans Group which is traded in London but has the pinksheet ticker MPEVF. I did not get a chance to look at it at all. Anyone who knows something can feel free in the comments. A long time reader, very long time (thank you), sent me this link about Ukrainian farmland, the black earth I mentioned earlier. There are plenty of companies to learn about regardless of whether they are accessible or not. I can vouch for Trigon Agri (TRGAF) from Sweden as being publicly traded.
Regardless of whether GRES should be bought or not there are some interesting individual holdings in the fund that could be worth learning about. To be clear these names are new to me and I have not looked at them. Nippon Beef Packers (NIPMF); Japan makes for a lousy top down pick but if the company exports beef to smaller healthier countries in Asia well, that could be interesting. Sino Forest (SNOFF) listed in Canada, owns land in China, went down a lot with the market and has come up a lot off the low. I’ve mentioned that one before. One more is Petropavlovsk (PPLKY) which mines gold and I think a few other things in Eastern Russia. I’ve never heard of it but it does have ADRs, as opposed to ordinaries. As a quick reminder a five letter symbol ending in Y makes it an ADR, ending in F makes it an ordinary share.
Yesterday I mentioned that Paraguay was no dice per Schwab. I then asked about these other firms allowing clients direct access to foreign markets and currency holdings and whether Schwab was going to keep up. Schwab used to be out in front with this sort of thing but not lately. They have things in the works but no public timeline as to when.