Volatility Returns, Not With a Bang, but With a Tweet

by: , Chief Investment Officer and Managing Director | IndexIQ

It had been an usually quiet time in the markets from a volatility point of view, with the CBOE VIX, an index that tracks volatility, generally trending down, declining from a high of about 36 last Christmas Eve to a low of around 12 in April.

That calm was interrupted by an evening tweet from President Trump on May 5th, threatening additional tariffs on Chinese goods. Until that moment, the thinking was that a trade deal was imminent. Since then, the markets haven’t been so sure, and that has been reflected in the VIX which jumped four points, or nearly 30%, the next day, and in the broad market averages, which fell on the news as well.

It just goes to show you that you never know where the next market surprise may come from. You can only be certain that out of that uncertainty something will always emerge. That brings us back to something I’ve written about a few times this year, the role of liquid alternatives in a portfolio. Liquid alts like our now 10-year old IQ Hedge Multi-Strategy Tracker ETF (QAI) are designed to provide a lower volatility alternative for maintaining market exposure. In the case of QAI, it invests in an underlying group of ETFs intended to replicate a broad range of hedge fund strategies, including macro, long/short, and event-driven. The first and largest multi-strategy alternative ETF, over the past decade QAI has demonstrated its ability to perform as designed across a variety of market conditions.

Volatility will always be a part of investing, and when it erupts it can pose a challenge to investors. By its nature it can’t really be anticipated. When it happens, behavioral issues become a concern – investors react to short-term events and fail to keep long-term goals in mind. They shift portfolio allocations or move to cash. Exposure to a liquid alt ETF like QAI can help manage this. Historically, QAI has tended to outperform during periods of volatility and an allocation to the fund can help manage risk across the portfolio.

In the last ten years, the markets have faced multiple challenges – the 2011 U.S. downgrade, the 2010 “Flash Crash,” Brexit, a sharp drop in Chinese equities, and Q4 2018’s broad market decline, to name a few. In all these instances, QAI fell less than the market as measured by the S&P 500. In the longer run, these disruptions have worked themselves out and the markets have returned to stability and moved higher. But investors who reacted with only the short-term in mind often missed those returns to the upside. Most of us, after all, are terrible market timers.

When it was first introduced ten years ago, QAI was a novelty, the first liquid alt ETF. Now, funds like this are seen as important tools for helping to manage risk across a portfolio. The exact nature of the risk is always changing but it will always be a part of the investing process. We don’t know where the next surprise will come from, though we may have a good idea as to which social media platform it will appear on first. But we do know that managing risk, and investor reaction to that risk, is critical to achieving long-term objectives, and one more reason to consider adding liquid alts.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

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.

The CBOE Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.

The 2011 U.S. downgrade by S&P was the first time the U.S. federal government was given a rating below AAA. S&P had announced a negative outlook on the AAA rating in April 2011. The downgrade to AA+ occurred four days after the 112th United States Congress voted to raise the debt ceiling of the federal government by means of the Budget Control Act of 2011 on August 2, 2011.

The 2010 Flash Crash was a United States trillion-dollar stock market crash, which started on May 6, 2010 at 2:32 p.m. EDT and lasted for approximately 36 minutes. Stock indices, such as the S&P 500, Dow Jones Industrial Average and Nasdaq Composite, collapsed and rebounded very rapidly.

Brexit is the withdrawal of the United Kingdom (UK) from the European Union (EU). Following a referendum held on 23 June 2016 in which 51.9 per cent of those voting supported leaving the EU, the Government invoked Article 50 of the Treaty on European Union, starting a two-year process which was due to conclude with the UK’s exit on 29 March 2019 – a deadline which has since been extended to 31 October 2019.

The S&P 500 Index, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE, NASDAQ, or the CBOE BZX Exchange.

Consider the Fund’s investment objectives, risks, and 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 a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, located at 51 Madison Avenue, New York, NY 10010, provides investment advisory products and services. 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.


Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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