6 Commodities and Alternatives ETFs

05/01/2012 6:15 am EST

Focus: ETFs

Adam Patti

CEO and Founder, IndexIQ

In Part Two of our conversation with Adam Patti, the CEO of IndexIQ talks about his firm’s mutual fund and some ETFs that replicate hedge-fund performance, as well as some the natural resources and commodities sectors. (You can read Part One here.)

Kate Stalter: You also have a mutual fund that replicates hedge-fund investment. Say a little bit about that.

Adam Patti: Yes, that is actually our first investable product, and that is very similar to the ETF I just mentioned, IQ Hedge Multi-Strategy Tracker ETF (QAI). It is a very similar product; it’s just really the mutual fund version.

So that was our first product. It has three, almost four years of actual history. [This is the IQ Alpha Hedge Strategy Fund (IQHOX)—Editor.]

It’s actually been our most successful product overall in terms of asset flows, QAI being our second- most successful [product] and the most successful ETF we have. Those products have been done very well.

And look—investors need to hedge. You need to diversify your portfolios. Problem is, unless you’re Warren Buffett or unless you’re CalPERS, big institutional investors, you’re not going to have access to hedge funds.

So how do you do it? These products were designed to help; they really democratize alternative investing. We have several of these.

We have a global macro version, IQ Hedge Macro Tracker ETF (MCRO). We’ve got a merged arbitrage ETF, which is IQ Merger Arbitrage ETF (MNA). So we’ve got a number of products really designed to help retail investors get more diversified.

Kate Stalter: I want to touch on one more category where IndexIQ is very strong, and that’s the natural resources area, commodities. In a number of the interviews I do, Adam, people have been talking about strength they see in those particular categories. Can you say something about that?

Adam Patti: Sure. And we definitely have the most unique commodity exposures. Our flagship commodity product is ticker symbol IQ Global Resources ETF (GRES).

It’s the broadest commodity ETF in the marketplace. It includes all the major commodity classes you would expect in a commodity fund, but it also has timber, water, and coal in the portfolio. So it’s very broad, and it’s been the best performing broad commodity product in the ETF market every year since its inception in 2009, with the lowest volatility.

So it’s a very unique product. That’s kind of our flagship. Everything else we do in the commodities space, we really focus on small caps. We love small caps, and the reason being is a similar story to IQ US Real Estate Small Cap ETF (ROOF)—what we talked about earlier about the REIT ETF. [The REIT ETF discussion was in part one of our interview with Patti—Editor.]

For instance, our agribusiness ETF—IQ Global Agribusiness Small Cap ETF (CROP)—is the only way to gain access to the hidden gems in the agribusiness market.

Now, for anyone that’s not following what’s going on in the food industry, you should take a look. The supply and demand dynamics there are very scary—very good for the companies in that space, but very scary in terms of the amount of people and the population growth and the demand for more sophisticated types of food as their economic circumstances improve. So it’s really a great place to look.

Kate Stalter: One of the things that our listeners who are individual investors are going to be curious about: You have all these different investment vehicles that they can choose from. If they’re looking at some of these, Adam, how would they make the determination whether some might be longer-term plays, or whether some might be areas to get into depending on market conditions?

Adam Patti: Well, this is what I tell everybody, and I do this myself: Everyone needs to have an asset-allocation plan. So you should have a plan that diversifies your core asset classes.

So call that your strategic plan. It has to be comprised of equities and fixed income, and commodities, and hedge fund-like vehicles, and that should be a plan that you stick with.

You should pick the right vehicles there, based on your research, based on longevity, performance, fees, tracking error. You need to look at all these different things, to determine which vehicles to use there.

Also, you should always rebalance your strategic allocation. I would say quarterly, but you could do it annually, and that’s a good way to run that.

But then you also want to have some room for your tactical ideas, and that’s where you can really try to add some performance to your portfolio by picking things like CROP, which is just mentioned, which could be a strategic allocation or a tactical allocation.

But if you’re bullish on the food industry and the farming industry, and you want to have a little more exposure there, use those tactically. And you could trade around your strategic allocation and hopefully be successful doing that to drive a little alpha.

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