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Interest Rate Hedge ETF Wins in 2022: What's Behind the Surge?

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Simplify Interest Rate Hedge ETF (PFIX - Free Report) , which provides hedge against rising interest rates, is the top-performing ETF of this year, having gained more than 62%.

The rally has been driven by rising rate worries. This is especially true as the Fed has been on an aggressive tightening spree in more than decades. Fed Chair Jerome Powell raised interest rates for the seventh time this year, taking the benchmark rate to the range of 3.75% and 4.00% — the highest level since 2008 (read: Top-Ranked ETFs to Play Fed's Seventh Rate Hike of 2022).

The increase in interest rates has made borrowing expensive, pushed up the cost of buying a new car or house, increased the cost of carrying credit card debt and thus heightened the risk of a recession. This will further boost the U.S. dollar against the basket of other currencies, thereby leaving a huge impact on commodity-linked investments. Thus, a rising-rate environment will hurt a number of segments.

In particular, high dividend-paying sectors such as utilities and real estate would be the worst hit, given their higher sensitivity to rising interest rates. Additionally, securities in capital-intensive sectors like telecom would also be impacted by higher rates. However, higher interest rates usually indicate a healthy economy, leading to greater consumer power and increased IT spending. This combination of factors will result in increased industrial activity and a pickup in consumer demand.

Though the central bank signaled more rate increases next year in its latest meeting in an unprecedented move to rein in inflation, the pace of hike will be slowed. It now projects at least 75 bps of rate hike, peaking at 5.1% by the end of 2023, 50 bps higher than the previously projected 4.6% back in September. The rate will then be cut to 4.1% in 2024.

While the continued tight monetary policy will bring down inflation, it means slower growth, a weaker job market and some pain for households and businesses. The U.S. economy is expected to grow just 0.5% in 2023 as unemployment rises to 4.6% from the recent 3.7%, based on Fed forecasts.

Inflation in the United States is cooling down gradually, underscoring that the worst of inflation has likely passed and the economy will be back on track sooner than expected. This is especially true as the consumer price index jumped 7.1% year over year in November, down from a 7.7% year-over-year increase in October and a recent peak of 9.1% in June. This represents the lowest annual increase since late 2021 (read: ETFs to Benefit as Inflation Drops to One-Year Low).

Let’s take a closer look at the fundamentals of PFIX.

PFIX in Focus

Simplify Interest Rate Hedge ETF is the first ETF providing a simple, direct and transparent interest rate hedge. It seeks to provide a hedge against a sharp increase in long-term interest rates and benefit from market stress when fixed-income volatility increases, while providing the potential for income.

Simplify Interest Rate Hedge ETF holds a large position in over-the-counter interest rate options intended to provide a direct and transparent convex exposure to large upward moves in interest rates and interest rate volatility. It invests in long-dated put options on 20-year US Treasury bonds to offer “the most liquid and the most cost-efficient way of getting interest rate protection (read: 5 ETFs That Gained More Than 20% This Year).

PFIX has accumulated $349.8 million in its asset base and trades in an average daily volume of 375,000 shares. It charges 50 bps in annual fees.

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