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3 New ETFs to Play Rising Rates

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Wall Street has been on a choppy ride since the start of 2022 due to rising rate worries and geopolitics. The 10-year U.S. Treasury yield hit a three-year high in early April on Federal Reserve’s faster policy tightening plan.

St. Louis Fed President James Bullard said that he seeks rising rates by 3% to 3.25% in the second half of 2022, while Chicago Fed President Charles Evans and his Atlanta counterpart Raphael Bostic said they favor raising rates to neutral. As a result, bond yields rose. The benchmark U.S. Treasury yield jumped to 2.85% on Apr 18, 2022 from 2.39% recorded at the start of the month.

Recent data showed that applications for U.S. state unemployment insurance dropped more than forecast, supporting the Fed’s argument that the economy is strong enough to endure faster rate increases. Growth stocks that underperform in a rising rate environment slumped heavily on such cues.

The 10-year rally specifically came after Fed minutes published on Apr 6 indicated that the central bank plans shrinking its balance sheet by $95 billion a month. Higher inflationary expectations emanating from supply chain disruptions as well as higher crude prices made Fed members comfortable with this kind of aggressive monetary policy tightening. Notably, the Fed had enacted its first rate hike in March since the start of the pandemic.

iShares 20+ Year Treasury Bond ETF (TLT - Free Report) has lost about 18.9% this year (as of Apr 18, 2022). No wonder, in the face of rising bond yields, investors might be fearing fixed-income investing as yields and bond prices are inversely related. Stocks are also on a declining trail due to rising rate worries, higher inflation and geopolitical tension.

New Rising Rate ETFs in Focus

There are some new ETFs that are designed to fight rising rates. These would help investors mitigate such threats yet emerge profitable. Below we highlight a few of them:

Simplify Interest Rate Hedge ETF (PFIX - Free Report) – Up 54.2% This Year

This ETF is active and does not track a benchmark.  The Simplify Interest Rate Hedge ETF seeks to hedge interest rate movements arising from rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for income.

The fund’s strategy includes initial investment of 50% of NAV in 7-year OTC payer swaption on the 20-year rate struck at 4.25%, providing direct exposure to rising rates. Option position is a strategic exposure to interest rates, expected to be reset only after extended periods of time or extreme rate moves. Option term and rate maturity are chosen to minimize cost of ownership; option strike and term chosen to maximize convexity. The fund charges 50 bps in fees.

Advocate Rising Rate Hedge ETF (RRH) – Up 14.9% YTD

The actively managed Advocate Rising Rate Hedge ETF is a multi-asset ETF that seeks to generate capital appreciation during periods of rising long-term interest rates, specifically interest rates with maturities of five years or longer.

The fund looks to achieve its investment objective primarily by investing in a combination of: U.S. Treasury securities; forwards, futures or options on various currencies; long and short positions on the short and long-end of the Treasury or swap yield curve via futures, swaps, forwards and other over-the-counter derivatives; long and short positions on equity indexes and/or investment companies, including ETFs; and commodity futures and options. The fund charges 85 bps in fees.

Foliobeyond Rising Rates ETF (RISR - Free Report) – Up 28.6% YTD

The FolioBeyond Rising Rates ETF is an actively managed exchange-traded fund that seeks to provide protection against rising interest rates while generating current income under stable interest rates. RISR invests primarily in interest-only mortgage-backed securities (MBS IOs) and U.S. Treasury bonds. MBS IOs are a negative duration security that generally benefit from rising rates. MBS IOs—and Treasuries to a lesser extent —generally provide income under stable rates, per the issuer.