IndexIQ has impeccable (market) timing: The company is starting to sell its second exchange traded fund that holds other ETFs.

The IQ Hedge Macro Strategy Tracker ETF ( MCRO) is aimed at replicating and providing hedge fund strategies in an exchange traded product. The IQ Hedge Macro Strategy Tracker ETF will target global macro strategies and emerging markets.

IndexIQ envisions the IQ Hedge Macro Strategy Tracker for use in conjunction with standard emerging market exposure. IndexIQ compares the ETF to the iShares Emerging Market Index Fund ( EEM) in its documents.

Holdings, as of April 30, were the iShares Emerging Market Index Fund, at 27% of assets; iShares Barclays 1- to 3-Year Treasury Bond Fund ( SHY), 18%; iBoxx Investment Grade Corporate Bond ( LQD), 14%. The remainder of the holdings is much smaller. Regarding asset allocation, the fund includes 33% in international equities, 29% in short-term bonds, 14% in corporate bonds, small exposures to international bonds and a 3.7% weighting to the ProShares UltraShort Real Estate ( SRS).

The chart, below, captures the back test of the fund. The best-performing asset is the index that underlies the iShares Emerging Market Index Fund and the orange line is the back-tested result of the IQ Hedge Macro Strategy Tracker.

IndexIQ

Clearly, the IQ Hedge Macro Strategy Tracker back test was far less volatile than pure emerging market equity exposure, one of the goals of the fund.

The prospectus spells out that the fund will own some combination of the above asset classes and changes could be as frequent as monthly.

My idea of an emerging market hedge fund would include things like Sri Lankan equities or pair-trade going long the Cambodian riel and short the Tanzanian shilling. This isn't possible with ETFs, but going long select emerging market destinations expected to outperform and short iShares Emerging Market Index Fund via an inverse index fund would be possible. Another idea could be to buy a basket of country funds to complement the bond funds held. This might allow IQ Hedge Macro Strategy Tracker to participate with more of the upside that emerging markets might offer.

There are plenty of individual country funds (a Peru fund is due to list later this month). EG Shares is in the process of rolling out a suite of emerging market sector funds, and there are several emerging market currency ETFs.

The reason to be so critical is that, conceptually, IndexIQ is on to something big. A product that somehow captures most of the upside and much less downside could be useful. In using ETFs, IndexIQ doesn't want the hassle and extra expense of using truly exotic tools like Cambodian currencies. There are ETFs that allow for sophisticated long/short pairings, currency trades and, if they opened up to include NYSE and Nasdaq stocks, they would be able to do more than own a lot of iShares Emerging Market Index Fund, U.S. bonds and few other things in different permutations.

I have faith that this ETF won't have a lot of volatility and could be, as the document says, "a core portion of your alternatives exposure." Still, I would expect the IQ Hedge Macro Strategy Tracker ETF to get left behind when emerging markets take off.
At the time of publication, SHY was a client holding.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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