iQ Income ETF Risk On Risk Off Model
Please note: The iQ Income ETF Risk On/Risk Off Model may move to a 100% money market position for an entire seasonal quarter when its risk-off conditions are triggered — during which time yield generation will be minimal.
Investment Objective
The iQ Income ETF Risk On/Risk Off (“RORO”) Model seeks to identify the top-performing bond ETFs at any given point in the market cycle while incorporating a disciplined mechanism to move to cash when broad fixed income conditions deteriorate. Income and capital preservation share equal billing here — the model is designed to participate when bond markets are healthy and step aside when they are not. The Model reconstitutes every February, May, August, and November.
Investment Process
The iQ Income ETF Risk On Risk Off Model begins with the full universe of domestically-traded bond ETFs — spanning Treasuries, investment grade, high yield, municipal, mortgage-backed, inflation-protected, floating rate, and short-term debt — and works through three sequential ranking passes to arrive at 5 holdings.
Pass 1 — Momentum + Yield: ETFs are ranked by 8-period earnings revision momentum and the top 25 advance. Those 25 are then ranked by 12-month average yield and the top 5 are selected — combining improving price momentum with a sustained income profile.
Pass 2 — Relative Strength + Relative Strength Index: From the Pass 1 output, ETFs are ranked by 1-period relative strength and the top 15 advance. The bottom 5 by 14-period Relative Strength Index (RSI) are then selected — identifying ETFs with near-term strength where the RSI has not yet become overbought, suggesting the move still has room to run.
Pass 3 — Range + Stochastic Oscillator: From the Pass 2 output, ETFs are ranked by their 12-month high-to-low price range ratio and the top 25 advance. The top 5 by 18-period Stochastic Oscillator are selected — favoring ETFs trading near the upper end of their annual range with confirmed positive momentum.
The final portfolio holds 5 ETFs drawn from the 85th percentile of the combined output across all three passes.
Risk-Off Mechanism: The model monitors the iShares Core U.S. Aggregate Bond ETF (AGG) monthly. When AGG's 3-period Money Flow Index (MFI) falls below 50 AND its price drops below its 500-day Simple Moving Average simultaneously, the entire portfolio moves to a money market position (BIL). This is the model's circuit breaker — when the broadest measure of the bond market is losing both capital flow support and long-term price trend, the model goes to cash entirely rather than searching for relative winners in a broadly deteriorating environment.
Potential Benefits
Each pass asks something different — momentum and yield, then relative strength with RSI headroom, then price range position confirmed by the Stochastic Oscillator. An ETF that clears all three is trending, not overbought, and trading near the strong end of its annual range. That combination is harder to fake than a single metric.
The AGG risk-off trigger is what makes this model distinctive. It watches the broadest bond market index for two things at once — weakening Money Flow Index and price below the 500-day Simple Moving Average. Both must be true before the model moves to cash. One condition alone isn't enough, which keeps the model from overreacting to normal fixed income volatility while still giving it a clear exit when conditions genuinely deteriorate.
Potential Risks: Concentrating in 5 positions means a single credit event, rate spike, or distribution cut can move the portfolio considerably. The sequential filtering process, while rigorous, is backward-looking — by the time earnings revision momentum, relative strength, and Stochastic Oscillator signals confirm strength, some of the move has already occurred. The AGG risk-off trigger operates on quarterly signals and may not react quickly enough during rapid fixed income selloffs. When the model moves to cash, it also foregoes any recovery that begins before the next rebalance confirms an all-clear.