The IQ Chaikin US Small Cap ETF (CSML), a multi-factor equally weighted ETF built around an approach created by 50-year Wall Street veteran Marc Chaikin, has enjoyed a good opening run since its launch in May 2017.
CSML’s assets are now over USD500 million and the fund has returned 12.64 per cent since inception.
CSML tracks the price and yield performance of the NASDAQ Chaikin Power US Small Cap Index, an index that incorporates the Chaikin Power Gauge, which seeks to find opportunities for outperformance via four primary factors: value, growth, technical, and sentiment.
Sal Bruno, Chief Investment Officer with IndexIQ, explains the background to the launch of CSML and its sister large cap ETF, the IQ Chaikin US Large Cap ETF (CLRG).
Index IQ has been part of New York Life Investments since 2015. “When we partnered with New York Life, part of that mandate was to expand our product line up and continue our spirit of innovation,” Bruno says.
Looking for ways to compete on equities in a low fee beta world, the firm partnered with Nasdaq who had themselves partnered with Mark Chaikin. In 2010, Chaikin built a multi factor model, the Chaikin Power Gauge, that seeks to remove emotion from the way managers manage money, and in 2014 this was licensed to Nasdaq.
CSML is based upon this model.“We launched it in 2017 bringing cutting edge research to the marketplace,” Bruno says. “It’s a great story and a compelling solution relative to active managers in the small cap space.”
The two ETFs, large and small cap, have close to USD900 million in them after a relatively short time period (CSML launched on May 16, 2017; CLRG launched on December 13, 2017) but it is the small cap version, with 215 names drawn from the Nasdaq 1500, that has flourished in recent market conditions.
“Small caps in the US have had a solid year, with the Russell 2000 up 10.5 per cent against the S&P 500’s rise of 7.8 per cent,” Bruno says. “Small caps have been the beneficiary of the new tax bill which has made them more profitable and so more attractive.
“And there have also been some other regulatory changes which have benefited small caps. A significant rollback in terms of regulation and easier environment for companies to do business benefits small caps more as there is a fixed cost to comply which represents a larger percentage of their revenue. Fewer regulatory steps to comply with is a relative benefit.”
Historically, small caps have outperformed over a long history. Fama French data from 1926 through June of 2018 shows them outperforming large caps by 250-300 basis points a year on average.
“Small caps are levered towards growth and the US is a growing economy and has been for a long time and small caps are beneficiaries of that,” Bruno says.
“Some of the trade wars and tariffs have hit the large caps a bit more but the small ones are domestically focused so relatively more immune from global political events and currency issues and not so dependent on exports for revenues so they have weathered the storms well.”
The new ETFs have seen acceptance split between RIAs and financial advisers and planners working for the wire house firms.
“We are very positive on small caps over the foreseeable future,” Bruno says. “They capture benefits in a disciplined way. We are very excited about it and our clients are as well.”
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