|
Third-Generation Indexing: Rules-Based Alpha™ |
IndexIQ's Rules-Based Alpha solutions take indexing to the next level by combining the benefits of traditional index investing with the alpha potential sought by active managers.
First-Generation Indexing and the Efficient Market Hypothesis
The first generation of indexing was born in the 1970s with the launch of the first retail index fund — the Vanguard 500 Index Fund. John Bogle's solution to the problem of underperforming actively managed mutual funds was brilliantly simple: Create a "passive" investment vehicle that tracks an index and run it at the lowest cost possible.
The combination of low costs, low turnover and the inherent tax efficiency of "first-generation," market cap-weighed index funds, has proven to be a powerful combination, but unfortunately, not without some important shortcomings.
The key flaw is that they are built upon the efficient market hypothesis, which simply put, states that markets are inherently rational and that they price stocks correctly. Accordingly, market cap-weighed index funds seek to capture the best available estimate of fair market value.
In real life, however, markets are not always rational or efficient. As a result, market cap-weighted funds that rely on stock prices as the only indicator of value, by design can become over-weighted in overvalued stocks and underweighted in undervalued stocks, potentially exposing investors to unnecessary risk. This is the world in which second-generation indexes were born.
Second-Generation Indexing: Using Real-World Measures of PerformanceUnlike the first-generation, second-generation or "alternatively-weighted" indexes do not weight securities by their size as measured by market capitalization, but instead rely on other fundamental factors. Using real-world measures of performance rather than only market prices to select and weight stocks has proven to provide some performance advantages over traditional indexing, but they too are not without shortcomings.
Alternatively-weighted indexes typically focus on factors such as dividends and book value to weight components, creating an excessive value bias that fails to effectively capture the upside potential of growth-oriented, market-leading companies.
Third-Generation Indexing: Rules-Based AlphaTM IndexIQ's Rules-Based Alpha solutions take indexing to the next level by combining the benefits of traditional index investing with the alpha potential sought by active managers to create solutions that can be used by all investors.
Unlike first- and second- generation indexes, IndexIQ's Rules-Based Alpha products are designed to translate sophisticated investment strategies into products that can be more easily accessed and understood by a broader range of investors. Rules-Based Alpha bridges the gap between traditional index investing and active management by combining the rules-based construction, low cost and tax efficiency of traditional index investing, with the alpha potential sought by active managers.
IndexIQ Indexes are Available in Various Constructions:
- Hedge Fund Replication: Sophisticated index strategies that seek to capture hedge-fund-like returns using fully transparent, liquid portfolios of publicly traded ETFs.
- Alternatively Weighted: Indexes that use operational metrics to identify market leaders, rather than simply choosing stocks based on market capitalization or other single-factor models.
- Tactical Rotation: Tactical rotation index strategies use the latest quantitative research across global equity and commodity markets to deliver strong risk-adjusted returns versus the relevant benchmarks.
- Intangible Asset Value: Index strategies that harness the power of a company's intangible value to generate long-term benchmark out performance.
|
About Us 
