IndexIQ, a New York based asset management firm, has announced the launch of the IQ Leaders GTAA Tracker ETF (NYSE Arca: QGTA) which provides exposure to the performance characteristics of leading global allocation mutual funds.

Adam Patti, CEO of IndexIQ.

The ETF does not invest in these mutual funds itself, but rather in a portfolio of highly liquid, low-cost ETFs that, when taken as a whole, is designed to replicate leading global allocation mutual funds’ aggregate performance. Global Allocation mutual funds have greater investment flexibility than traditional balanced funds; they are able to rapidly switch between asset classes and geographic regions, ideally allowing them to pursue opportunities and avoid painful downturns.

Adam Patti, CEO of IndexIQ explains: “While the global allocation mutual fund category has been growing over the past few years, assets are highly concentrated among a handful of funds. Our research has found that global allocation mutual funds, when aggregated, display significant exposures to a set of common asset classes. This spurred the idea to build an index that has similar exposures to the same asset classes and then create an ETF to provide exposure to those returns with the price and tax efficiency inherent in the ETF structure, while also eliminating idiosyncratic manager risk.”

The fund tracks the IQ Leaders GTAA Index. To construct the Index, the firm first follows a rules-based process to select mutual funds considered to belong to a ‘leaders’ category. This entails calculating composite scores for each fund based on a weighted average of three criteria scores: fund size (40% weighted), as measured by assets under management; fund performance (20% weighted), as measured by 24 month total return; and fund quality (40% weighted), as measured by multiple factors including long-term performance, short-term performance, and changes in key personnel. The top ten highest ranking funds constitute the ‘leaders’ and their returns are averaged to calculate the ‘leaders’ series’ return.

The next step involves analysing the correlations between the returns of liquid ETFs listed on a major US exchange and those of the series. At the same time, IndexIQ assigns a score to each ETF based on how closely the investment strategy of the fund corresponds to the approach of the series. The firm thereby uses a proprietary model to select a combination of ETFs that replicate both the performance and the broad strategy of the series.

IndexIQ has previously specialised in providing hedge fund styled products, offered through more accessible channels such as ETFs. Their flagship product, the IQ Hedge Multi-Strategy Tracker ETF (NYSE Arca: QAI), has gathered over $1bn since its 2009 launch. The fund replicates the risk-adjusted return characteristics of a combination of hedge fund strategies, including long/short equity, global macro, market neutral, event-driven, emerging market exposure, and fixed income arbitrage.

“In looking for new areas where we could deliver value and unique exposures to investors and advisors, it became clear to us that a similar approach to that behind our successful line of hedge fund replication vehicles could be ported over to the mutual fund world,” noted Patti.

“Since 2007, our replication technology has proven to successfully replicate opaque hedge fund strategies. This same technology is being used to provide the performance of market leading global allocation mutual funds, however with a lower fee, far greater tax efficiency and full transparency.”

As of 6 October 2015, the fund had significant holdings in the Vanguard FTSE Developed Markets ETF (21.2%), the Vanguard Total Bond Market ETF (15.7%), the iShares Core US Aggregate Bond ETF (15.6%), the iShares Russell 2000 ETF (8.5%), and the SPDR Materials Select Sector ETF (6.6%).

The fund has a total expense ratio of 0.45%. The tax efficiency of the ETF structure may also enhance the relative performance of this product versus the mutual fund category.

The IQ Leaders GTAA Tracker ETF is the firm’s sixth new venture this year, joining a suite of previous launches which includes:

IQ Hedge Long/Short Tracker ETF (NYSE Arca: QLS);

IQ Hedge Event-Driven Tracker ETF (NYSE Arca: QED);

IQ 50 Percent Hedged FTSE International ETF (NYSE Arca: HFXI);

IQ 50 Percent Hedged FTSE Europe ETF (NYSE Arca: HFXE);

IQ 50 Percent Hedged FTSE Japan ETF (NYSE Arca: HFXJ).