Graduate Seminar: Momentum Investing in Fixed Income ETFs. Sponsored by:

Transcription

1 Graduate Seminar: Momentum Investing in Fixed Income ETFs Sponsored by:

2 Speakers Poul Kristensen, CFA Managing Director, Portfolio Manager & Economist Charlie Reinhard Managing Director, Head of Portfolio Strategy

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6 MOMENTUM INVESTING IN FIXED INCOME ETFS Smart Solutions for Building Better Portfolios

7 Agenda I. Economic & Market Outlook: Muddle-Through economic recovery II. Momentum Investing in Fixed Income: Can momentum investing be applied to fixed income to enhance core bond returns? III. Portfolio Solutions: Smart beta implementation in a well diversified portfolio.

8 Smart Solutions for Building Better Portfolios Founded in 2006, IndexIQ is focused on offering institutional class alternative investment strategies that are liquid, transparent, low cost, and tax-efficient. IndexIQ is a pioneer and leading provider of innovative solutions, focused on absolute return, real assets, global/international, and fixed income strategies that seek to democratize investment management by enabling a broad range of investors to take advantage of the attractive risk/return characteristics of alternatives, while also benefitting from the structural strengths of ETFs and mutual funds. IndexIQ s investment solutions are building blocks for modern portfolio diversification*: Low volatility Attractive up/down capture Low correlation to traditional asset classes Liquid, transparent, low cost, and tax-efficient Diversification does not protect against losses. *Ordinary brokerage commissions apply. IndexIQ s ETF holdings are available daily on IndexIQ s web site. ETFs are liquid in that they are exchange-traded. The nature of the IQ Hedge products allows for these potential benefits, which typically are not associated with traditional hedge funds.

9 IndexIQ: Current Investment Solutions Absolute Return Hedge Strategies Fixed Income Enhanced Core Bond Real Assets Commodities/Natural Resources QAI IQ Hedge Multi-Strategy Tracker ETF Multi-Strategy - Core Hedge Alternative AGGE IQ Enhanced Core Bond US ETF Core Bond Allocation GRES IQ Global Resources ETF Core Commodity Exposure QMN IQ Hedge Market Neutral Tracker ETF Fixed Income Hedge Alternative AGGP IQ Enhanced Core Plus Bond US ETF Core Plus Bond Allocation CROP IQ Global Agribusiness Small Cap ETF Farming & Agriculture MCRO IQ Hedge Macro Tracker ETF Equity Income Hedge Global/International IOIL IQ Global Oil Small Cap ETF Pure Oil QLS QED MNA IQHIX/ IQHOX Inflation Hedge CPI IQ Hedge Long/Short Tracker ETF Long/Short Exposure IQ Hedge Event-Driven Tracker ETF Event-Driven Exposure IQ Merger Arbitrage ETF Global Mergers & Acquisitions IQ Hedge Multi-Strategy Plus Fund Multi-Strategy Core Hedge Alternative IQ Real Return ETF Short Term/TIPS Bond Alternative Currency Hedged Equity HFXI HFXE HFXJ Multi-Asset QGTA IQ 50 Percent Hedged FTSE International ETF Currency Hedge International Developed Markets IQ 50 Percent Hedged FTSE Europe ETF Currency Hedge Europe IQ 50 Percent Hedged FTSE Japan ETF Currency Hedge Japan IQ Leaders GTAA Tracker ETF Core Global Allocation CNDA KROO Real Estate ROOF IQ Canada Small Cap ETF Resource-Rich Canada Small Cap IQ Australia Small Cap ETF Resource-Rich Australia Small Cap IQ US Real Estate Small Cap ETF REITs Each IndexIQ solution is a first of its kind, providing previously unavailable exposure. MainStay Investments is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, 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. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

10 Economic & Market Outlook Muddle-through economic recovery Lower rates for longer Single digit return environment

11 The U.S. and Global Economies are Poised to Improve in 2016 Source: International Monetary Fund s World Economic Outlook (WEO), July 2016.

12 Percent The Probability of Recession is Currently Low Smoothed U.S. Recession Probabilities Smoothed U.S. Recession Probabilities Source: Piger, Jeremy Max, Chauvet, Marcelle. Shaded areas indicate U.S. recessions 2015 research.stlouisfed.org. The above is a popular recession probability index computed by Marcelle Chauvet and Jeremy Piger. This forecast is backed up by research the authors have published in the peer-reviewed journals International Economic Review and the Journal of Business and Economic Statistics.

13 Index China Purchasing Managers Index Purchasing Managers Index The Purchasing Managers Index is a survey of Chinese manufacturers. The Index is based on responses to survey questions on new orders, production, employment, inventories and exports and gives a monthly indication of activity in Chinese manufacturing. Source: National Bureau of Statistics of China. Past performance is no guarantee of future results. It is not possible to invest in an index.

14 Monetary Policy and Stock Market Returns The U.S. stock market has performed better when rates rose slowly S&P 500 Index Performance Around the Start of Fed Tightening Cycles (Start Date = 100) Source: Ned Davis Research Group, as of 3/31/16. S&P 500 Index is defined as an index of 500 stocks chosen for market size, liquidity, and industry grouping and is designed to be a leading indicator of U.S. equities and reflect the risk/return characteristics of a large-cap universe. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index.

15 Election-Year Stock Market Price Cycle

16 Market Performance The U.S. stock market has historically recovered from short-term panics Dow Jones Industrial Average Median Returns During Crisis Mode -2.9% 1 Month 4.6% 3 Months 6.1% 6 Months 9.3% 12 Months 16.9% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% Source: Ned Davis Research, as of 3/31/16. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index. During crisis mode is represented by the financial panic of 1907 and 53 subsequent identified panics (a.k.a. black swan events). A black swan is an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict. The time periods of 1 month, 3 months, 6 months, and 12 months represent the time period following each black swan event.

17 Global Dividend Yields Domestic and global dividend-yielding stocks may be attractive investments for those looking to diversify their sources of income Dividend Yields for Global Equities MSCI EAFA 3.42 MSCI World ex. USA 3.37 MSCI Emerging Markets 2.68 MSCI World 2.59 S&P Source: Thomson Reuters Datastream, New York Life Investments, 7/21/16. Dividend Yields are calculated as the dividends paid out over the most recent 12 months, as a % of the current equity price. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index.

18 % Year-over-year change ISM Manufacturing Purchasing Managers Index U.S. Equity Outlook The S&P 500 has historically correlated with the Purchasing Managers Outlook High PMIs Tend to Precede Increases in Stock Market Performance S&P 500 YoY Change (%) ISM Manufacturing Purchasing Managers Index Source: Bloomberg, 6/30/16. Past performance is no guarantee of future results, which will vary. The S&P 500 Index is widely regarded as the standard for measuring large-cap U.S. stock-market performance. Index results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index. The Institute of Supply Management (ISM) Purchasing Managers' Index (PMI) is an indicator of the economic health of the manufacturing sector.

19 U.S. Equity Outlook Room to run New all-time highs for the S&P following a bear market New all time high Bull Market End Calendar Days between High and % Gain from New All time High to Bull Cyclical Peak End 9/22/1954 4/6/ % 9/24/1958 1/5/ % 1/27/ /13/ % 9/3/1963 2/9/ % 5/4/ /3/ % 3/6/1972 1/11/ % 7/17/1980 4/27/ % 11/3/ /29/ % 1/21/1985 8/25/ % 7/26/1989 7/16/ % 2/13/1981 7/17/ % 11/23/1998 1/14/ % 5/30/ /9/ % 3/28/2013 5/19/ % 7/11/ Mean % Median % Source: Ned Davis Research, 7/18/16. Past performance is no guarantee of future results, which will vary. It is not possible to invest directly in an index Source: Ned Davis Research, 7/18/16. Past peormance is no guarantee of future results, which will vary. It is not possible to invest directly in an index

20 U.S. Treasury Yield Curve Historically, as displayed in the chart below, previous recessions were preceded by an inversion of the Treasury yield curve. However, the Treasury yield curve is currently steep. A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. Past performance is no guarantee of future results.

21 High Yield Spreads and Defaults High-yield bond spreads are the percentage difference in current yields of various classes of high-yield bonds (often junk bonds) compared against investment-grade corporate bonds, Treasury bonds, or another benchmark bond measure. Data above is represented by the BofA Merrill Lynch US High Yield Master II Option-Adjusted Spread, which tracks the performance of U.S. dollar denominated below investment-grade corporate debt publicly issued in the US domestic market. Past performance is no guarantee of future results. An investment cannot be made directly into an index.

22 Total Return, % CAGR, Five Following Years Opportunity in Fixed Income Single-digit return environment Historically, as the yield on High Yield Bonds increases, so has the potential for higher returns 25.0% 20.0% 15.0% 10.0% R² = % 0.0% -5.0% High-Yield Bond Yields (%) Historical Total Annualized Return vs. Yield Estimate Linear Trendline Source: Bloomberg, 6/30/2016. High-yield bond returns are represented by the Barclays U.S. Corporate High Yield Bond Total Return Index and Yields are represented by Barclays U.S. Corporate High- Yield Yield to Worst Index. The data begins as early as available in December of Past performance is no guarantee of future results. It is not possible to invest directly in an index.

23 Economic & Market Outlook Slow and uneven expansion continues Rates stay lower, longer Bumpy single-digit returns

24 It s Time For Fixed Income Momentum Investing

25 Historical Time-Line For Momentum Investing Futures, Inc., the first publically traded commodity investment fund, utilizing trend-following techniques, founded by Richard Donchian Richard Driehaus set up Driehaus Capital Management LLC, which had great success with equity momentum strategies Grinblatt and Han paper in Journal of Financial Economics documented that systematic and persistent behavioral patterns among investors can explain momentum effects Asness, Moskowitz and Pedersen paper in Journal of Finance documented momentum effects across asset classes and countries, stocks, equity index futures, government bonds, currencies and commodity futures Studies show significant role of smart beta factors, including momentum, in the positioning of active fund managers Richard Donchian started publishing Commodity Trend Timing, a newsletter containing numerous articles on trend following techniques which are now considered classics Jegadeesh/Titman paper in Journal of Finance the first to document that momentum strategy in individual stocks could generate superior riskadjusted returns net of trading costs Jostova, Nikolova, Philipov and Stahel paper in Review of Financial Studies documented significant momentum effects in corporate bond returns The first ETFs utilizing a rulesbased momentum strategy within fixed income launched: AGGE and AGGP!

26 A Tale of Two Investors Momentum Investor: Picks the top two performing fixed income categories, following the recent trend, i.e., betting on momentum. Contrarian Investor: Picks the two worst-performing fixed income categories, taking the contrarian position, i.e., betting on a reversal of recent trends. $7,000 $6,000 $5,000 $4,000 $3,000 A Tale of Two Investors Portfolio Value on 1 /2 9/2016 when investing $ 100 on 1 /1/1 963 $6, Allowing the trend to be your friend resulted in an over 4x higher-ending portfolio balance over the long term. $2,000 $1,000 $1, $- Momentum Investor Contrarian Investor *See appendix for index definitions. Source: Morningstar as of 1/29/16. Past performance is no guarantee of future results, which will vary. An investment cannot be made directly into an index.

27 Consistent Return Advantage with Momentum The Momentum Investor Outperformed the Contrarian Investor 62% of the Time Past performance is no guarantee of future results, which will vary. The momentum investor purchased the two fixed income segments that performed the best during the past twelve months. The contrarian investor purchased the tow segments that have declined the most in value over the past twelve months, expecting a reversal in trend.

28 Allocating To Sectors Within Fixed Income Sector Volatility Return, CAGR Period Money Market 0.9% 4.9% Short Treasury Notes 2.9% 6.1% Intermediate Treasury Notes 4.9% 6.6% Intermediate/Long Treasury Notes 7.1% 6.9% Long Treasury Notes/Bonds 11.1% 8.5% Mortgage-Backed Securities 6.6% 7.4% Investment Grade Corporate Bonds 6.8% 8.6% High Yield Corporate Bonds 9.2% 9.1% Past performance is no guarantee of future results, which will vary. An investment cannot be made directly into an index.. See appendix for index definitions. Volatility can be measured by using the standard deviation or variance of returns from that same security or market index. Standard deviation is a measure of the dispersion of a set of data from its mean.

29 Momentum-Style Investing Does Not Necessarily Mean Higher Volatility Fixed Income Momentum Risk/Reward Benefits Consistent with Those in Equities Fixed Income Equity Source: Bloomber, Federall Reserve Economic Data (FRED). Data library on Professor Kenneth R. French s web site, Dartmouth Univeristy, The mpmentum-sorted portfolios of Professor K.R. French use the past 12-month cumulative total return of each stock, but skip the most recent month s return. The momentum investor purchased the two fixed income segments that performed the best during the past twelve months. The contrarian investor purchased the tow segments that have declined the most in value over the past twelve months, expecting a reversal in trend. Past performance is no guarantee of future results, which will vary. An investment cannot be made directly into an index.. For details on how indices were compiled, see appendix. Volatility can be measured by using the standard deviation or variance of returns from that same security or market index.

30 How To Visualize Diversification Benefits 5 Correlation = 0 5 Correlation = Correlation = Correlation = Correlation = Correlation =

31 Fixed Income Momentum Returns Are Not Dependent on the Equity Markets Low to Negative Correlations between Fixed Income Momentum and Equity Momentum Excess Returns Past performance is no guarantee of future results, which will vary..

32 Fixed Income Momentum Returns and the Broad Bond Market Low Correlation between Momentum Investor Excess Return and Broader Bond Market Excess Returns Past performance is no guarantee of future results, which will vary..

33 Five Punch Lines On Momentum Fixed Income Investing Momentum-style investing has been around for decades in equities, commodities and FX and is therefore time-tested. It s time to apply it within fixed income as well. Recent academic research documents that momentum-style investing can enhance returns in fixed income: We are proud to present the first ETFs utilizing such an approach. Momentum-style fixed income investing is a diversifying source of potential return: Performance is not dependent on the direction of the wider bond and equity markets, and not closely tied to the performance of equity momentum either Historical data show that momentum style investing in fixed income outperformed the contrarian approach. Structural changes in institutional investor behavior are likely to continue to create persistent and pervasive trends in fixed income. Past performance is no guarantee of future results, which will vary..

34 Smart Beta: Passive with Active Characteristics

35 Taxable Fixed Income Allocations Note: The hypothetical allocations are for illustrative purposes only. Weights have been rounded using 5% increments. Source: New York Life Investment Management and MainStay Investment,

36 Choosing Active or Passive Solutions When the relative benefits of choosing a top-performing active solution are relatively low, it might make sense to side with a passive one. Source: Morningstar, 3/31/16. Past performance is not indicative of future results. An investment cannot be made directly into an index

37 Building a Smarter Core Video Series

38 IndexIQ: Current Investment Solutions Absolute Return Hedge Strategies Fixed Income Enhanced Core Bond Real Assets Commodities/Natural Resources QAI IQ Hedge Multi-Strategy Tracker ETF Multi-Strategy - Core Hedge Alternative AGGE IQ Enhanced Core Bond US ETF Core Bond Allocation GRES IQ Global Resources ETF Core Commodity Exposure QMN IQ Hedge Market Neutral Tracker ETF Fixed Income Hedge Alternative AGGP IQ Enhanced Core Plus Bond US ETF Core Plus Bond Allocation CROP IQ Global Agribusiness Small Cap ETF Farming & Agriculture MCRO IQ Hedge Macro Tracker ETF Equity Income Hedge Global/International IOIL IQ Global Oil Small Cap ETF Pure Oil QLS QED MNA IQHIX/ IQHOX Inflation Hedge CPI IQ Hedge Long/Short Tracker ETF Long/Short Exposure IQ Hedge Event-Driven Tracker ETF Event-Driven Exposure IQ Merger Arbitrage ETF Global Mergers & Acquisitions IQ Hedge Multi-Strategy Plus Fund Multi-Strategy Core Hedge Alternative IQ Real Return ETF Short Term/TIPS Bond Alternative Currency Hedged Equity HFXI HFXE HFXJ Multi-Asset QGTA IQ 50 Percent Hedged FTSE International ETF Currency Hedge International Developed Markets IQ 50 Percent Hedged FTSE Europe ETF Currency Hedge Europe IQ 50 Percent Hedged FTSE Japan ETF Currency Hedge Japan IQ Leaders GTAA Tracker ETF Core Global Allocation CNDA KROO Real Estate ROOF IQ Canada Small Cap ETF Resource-Rich Canada Small Cap IQ Australia Small Cap ETF Resource-Rich Australia Small Cap IQ US Real Estate Small Cap ETF REITs Each IndexIQ solution is a first of its kind, providing previously unavailable exposure. MainStay Investments is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, 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. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

39 Appendix Sector Index Period Money Market 3M Treasury Bills Short Treasury Notes 1-3Y Treasury Index Intermediate Treasury Notes 3-5Y Treasury Index Intermediate/Long Treasury Notes 5-7Y Treasury Index Long Treasury Notes/Bonds 7-10Y Treasury Index Mortgage-Backed Securities 10+ Treasury Index Investment Grade Corporate Bonds BAML US Corporate Master Index High Yield Corporate Bonds BAML US HY Master II Index 1980-

40 Appendix 3M Treasury Bills: Federal Reserve Economic Data (FRED) online data library. Monthly returns are calculated as 3M T-Bill Rate at beginning of month / Y Treasury Index: From Dec 1962 Dec Jul 1976, not included. From Jul 1976 Dec 1979, we use a proxy 2Y Treasury Note Total Return Index created via a regression of total returns on levels and changes in the 2Y Treasury yield from Thomson Reuters. From Dec 1979-Dec 1991, we use Thomson Reuters Datastream s 2Y Treasury Note Total Return Index. From Dec Dec 2016, we use the Bloomberg/EFFAS 1-3Y US Treasury Total Return Index [don t understand how data from Dec 1962-Dec 1991 was obtained. Proxy via regression or Thompson Reuters? Same for all Treasury indices that follow] 3-5Y Treasury Index: From Dec Dec 1979, we use a proxy 5Y Treasury Note Total Return Index created via a regression of total returns on levels and changes in the 5Y Treasury yield from Thomson Reuters. From Dec 1979-Dec 1991, we use Thomson Reuters Datastream s 5Y Treasury Note Total Return Index. From Dec 1991-Dec 2016, we use the Bloomberg/EFFAS 3-5Y US Govt Total Return Index 7-10Y Treasury Index: From Dec Dec 1979, we use a proxy 10Y Treasury Note Total Return Index created via a regression of total returns on levels and changes in the 10Y Treasury yield from Thomson Reuters.. From Dec 1979-Dec 1991, we use Thomson Reuters Datastream s 10Y Treasury Note Total Return Index. From Dec Dec 2016, we use the Bloomberg/EFFAS 7-10Y US Govt Total Return Index 10+Y Treasury Index: From Dec 1962 Mar 1977, not included. From Mar 1977-Dec 1979, we use a proxy 30Y Treasury Bond Total Return Index created via a regression of total returns on levels and changes in the 30Y Treasury yield from Thomson Reuters. From Dec 1979-Dec 1991, we use Thomson Reuters Datastream s 30Y Treasury Bond Total Return Index. From Dec 1991-Dec 2016, we use the Bloomberg/EFFAS 10+Y US Govt Total Return Index MBS Index: From Dec 1962 Dec 1976, MBS are not included. From Jan 1976-Dec 2016, we use the Barclays U.S. Mortgage Backed Securities Index. Investment-Grade Corporate Bond Index: From Dec 1962 Dec 1979, not included. From Dec 1979-Dec 1989, we use the Citi USBIG Corporate Index. From Jan 1990 Dec 2016, we use the BAML U.S. Corporate Master Index. High Yield Corporate Bond Index: From Dec 1962 Dec 1979, not included. From Dec 1979-Aug1986, we use the BAML U.S. High Yield 100 Index. From Sep 1986 Dec 2016, we use the BAML U.S. High Yield Master II Index.

41 For more information, visit our website IQetfs.com or call As with all investments, there are certain risks of investing in the Fund. The Fund s shares will change in value and you could lose money by investing in the Fund. The Fund s investment performance, because it is a fund of funds, depends on the investment performance of the ETPs in which it invests. Funds that invest in bonds are subject to interest rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, which is the possibility that the bond issuer may fail to pay interest and principal in a timely manner. The principal risk of mortgage-backed securities is that the underlying debt may be prepaid ahead of schedule if interest rates fall, thereby reducing the value of the Fund s investment. If interest rates rise, less of the debt may be prepaid, and the Fund may lose money. The value of the Fund s investment in ETPs is based on stock market prices and the Fund could lose money due to stock market developments, the failure of an active trading market to develop, or exchange trading halts or de-listings. Securities of issuers based in countries with developing economies (emerging markets) may present market, credit, liquidity, legal, political, and other risks different from, or greater than, the risks of investing in developed foreign countries. Emerging markets are subject to greater market volatility than more developed markets. High yield securities have speculative characteristics and present a greater risk of loss than higher quality debt securities. These securities can also be subject to greater price volatility. As a new fund, there can be no assurance that it will grow to or maintain an economically viable size, in which case it may experience greater tracking error to its Underlying Index than it otherwise would at higher asset levels, or it could ultimately liquidate. Consider the Funds 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 Funds and are available by visiting IQetfs.com or calling Read the prospectus carefully before investing. MainStay Investments is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, 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. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of IQ Hedged Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

42 Speakers Poul Kristensen, CFA Managing Director, Portfolio Manager & Economist Charlie Reinhard Managing Director, Head of Portfolio Strategy