Innovation. Every company talks about it, but not every company does it well. Those that do can create a significant long-term competitive advantage, and those who are committed to investing in research and development are, in our view, generally more likely to be those that bring winning new ideas and products to market.
With that in mind, IndexIQ has recently introduced three new exchange-traded funds (ETFs) that seek to invest in R&D leaders in the U.S. (IQ US Large Cap R&D Leaders: LRND; IQ US Mid Cap R&D Leaders: MRND) and globally (IQ Global Equity R&D Leaders: WRND). These funds seek to identify companies with a commitment to investing in R&D and that exhibit strong growth potential.
This “fundamental” approach offers an advantage over market capitalization-based index construction, which tends to result in higher weights in securities and sectors with stronger performance. This is an implicit form of momentum investing — overweighting securities because they have had positive performance.
By contrast, fundamental indexes seek to identify and overweight characteristics that can improve performance, like R&D. Research has shown that companies with above-average R&D spending have had higher annualized returns than companies with lower-than-average R&D spending. Additionally, the average return for all companies reporting R&D spending was higher than for companies that had no reported R&D spending.
Other benefits associated with above-average R&D spending include lower volatility, lower market risk (beta), smaller drawdowns, higher alpha (excess return over the market) and higher risk-adjusted returns as measured by Sharpe Ratio.
The table below illustrates the performance of companies in the Russell 1000 Growth Index grouped by R&D spending over the period 3/31/2001-12/31/2021.
Value of R&D underestimated
The idea of a stock’s “fundamental value” is one that is much talked about but not directly observable. R&D spending can act as a proxy for this while at the same time helping to eliminate the bias towards momentum stocks inherent in a market cap approach. That markets have consistently underestimated the long-term value of R&D expenditures creates further opportunity.
For investors, we believe the R&D strategy may help to identify companies and sectors where the future value of growth potential is being mispriced when compared to market cap-weight indexes. By overweighting companies with a strong commitment to research & development, these ETFs offer an attractive substitute for a growth equity allocation and the potential to improve a portfolio’s overall risk-return profile.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
Click on the fund name for the most current fund page, which includes, the prospectus, investment objectives, performance, risk, and other important information. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Visit nylinvestments.com/etfs and nylinvestments.com/funds and for the most recent month-end performance.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This material contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
Beta is a measure of historical volatility relative to an appropriate index based on its investment objective. A beta greater than 1.00 indicates volatility greater than the benchmark’s.
Alpha measures a fund’s risk-adjusted performance and is expressed as an annualized percentage.
The Russell 1000® Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000® Index companies with higher price-to-book ratios and higher forecasted growth values.
Consider the Funds’ investment objectives, risks, charges, and expenses carefully before investing. The prospectus, or summary prospectus, and the statement of additional information include this and other relevant information about the Funds and are available by calling (888) 474-7725 for IndexIQ ETFs. Read the prospectus carefully before investing.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.
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