Let's Put the IQ Healthy Hearts ETF Through Its Paces

Sometimes ETF issuers have innovative approaches to either defining a new investment opportunity or redefining an existing strategy. Last year, Index IQ launched the IQ Healthy Hearts ETF that tracks the IQ Candriam Heart Healthy Index, which is calculated and administered by Solactive. The fund sports a 45-basis-point expense ratio, meaning that an investor with $1,000 invested over a calendar year would expect to pay fees of $4.50 over that period. Looking at the index methodology, security selection begins with the Solactive GBS Global Markets Investible Universe Index, which outlines a methodology whereby Solactive first establishes country-level indexes and then rolls them up to form the top-level global index. Constituents are free-float market capitalization weighted. From that global universe, names are screened and ranked from 0-10 for activities in the following areas: *Diagnosis and/or treatment of cardiovascular diseases, such as atherosclerosis, thrombosis, infarcts and vascular surgery *Manufacturing and distribution of healthy food *Manufacturing and distribution of wellness products *Providing services allowing people to access information about health and thereby make better informed decisions *Providing solutions for people to track their fitness and engage in healthy lifestyle Any company that scores a 0 is removed from the overall pool. Those remaining names are screened against a host of what are described as Controversial Activities, including but not limited to Weapons Manufacturing, Adult Content (>5%), Genetic Modification (>10%), Coal (>10%) and others. Names are also screened against the UN Global Compact, which is a voluntary set of guidelines promoting what it describes as Sustainable Development Goals. That list is filtered against some quantitative limits such as $1 billion market capitalization and a $2.5 million 20-day average daily value traded minimum. To arrive at the final list, names are bucketed by market capitalization and top-scoring companies are selected. The index has a maximum of 80 constituents with a 15% cap on emerging markets exposure. Stress Test While the fund is not promoted as a defensive product, it did better than the SPDR S&P 500 ETF in the year-to-date period that ended March 16, 2022, returning -5.30% as compared to SPY being down 8.28%. What I thought was interesting was that the fund did not do better than the Health Care Select Sector SPDR Fund , which returned -4.87% over the same period. After running some attribution I found that the top 10 contributing holdings were solidly in the healthcare sector with names such as AstraZeneca , Medtronic and Merck . The top 10 names as a group did well over the one-year period but not well enough to counter the overall trend, hence the fund's negative return. Looking at the laggards in the portfolio, I saw some names that seemed to fit based on the health goals of the fund, such as Puma (PUM-DE) and Nike . What I also saw were some names that seemed tangential to the theme, such as roof rack manufacturer Thule Group (THULE-SE). They do make good products and I guess their customers are using these racks to get outside. The same sentiment goes for golf equipment manufacturer Callaway Golf , Garmin and Pool Corp. . What kind of stopped me in my tracks was seeing Apple , Alphabet and, to a certain extent, Kellogg , which I'll get into as I wrap up in the next section. Wrap It Up As that icon of American jazz Ella Fitzgerald (and later, Bananarama & Fund Boy Three) once sang, Tain't what you do it's the way that you do it. This ethos is one that every product development team needs to embrace. There are an untold number of views on the market and new areas of economic activity emerging every day. Oftentimes these trends are easily identifiable. However, when it comes to building a portfolio that looks to capture the new sector it can be very hard to identify the companies that are focused solely on that emerging space. For example, 2021 Alphabet acquisition Fitbit makes a great product and provides a wealth of health-related information to users. However, it is estimated that Fitbit generated $1.13 billion of revenue in 2020. In 2020, Alphabet generated $182.5 billion in revenue. There is so much more outside of Fitbit revenue that is guiding Alphabet that seeing it in this portfolio just doesn't make sense. That said, the bulk of the names in this fund seem to fairly represent the focus as described. As long as the consumer-focused names don't end up dragging down the healthcare names in the near term, this fund might be worth a look.

Let's Put the IQ Healthy Hearts ETF Through Its Paces

A closer look at the fund's composition leads to a few head-scratchers, but most of the names seem to fairly represent its focus.

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