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Rising Rate ETF Outperforms in February: Here's Why

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Advocate Rising Rate Hedge ETF , which offers income during periods of rising long-term interest rates, was the top-performing ETF of February, having gained about 16%. The rally was driven by fears that the Fed will keep raising rates for longer than expected.

The Fed’s preferred inflation gauge accelerated in January at its fastest pace since June, while the consumer price index jumped 0.5% in January following a 0.1% increase in December. Both the gauges have shown rising inflation and will thus prompt the central bank to raise interest rates to an even higher peak level and hold them there through the year.

Additionally, recent rounds of economic data suggest stronger economic activity and have rekindled worries about a longer-than-expected Fed rate hike. U.S. consumer spending increased the most in nearly two years in January and retail sales also increased the most in nearly two years in January after two straight monthly declines. Hiring surged with the economy adding a solid 517,000 jobs in January. The unemployment rate fell from 3.5% to 3.4%, the lowest since 1969. Business activity unexpectedly rebounded in February, reaching its highest level in eight months (read: Higher Spending to Boost Consumer Discretionary ETFs).

The housing market is showing signs of improvement. U.S. builder confidence has risen for the second consecutive month to the highest level since September 2022. Signed contracts to buy existing homes in the United States rose the most since June 2020 in January.

As a result, Treasury yields continued their climb on more interest rate hikes from the Federal Reserve. The short-term two-year Treasury yield jumped to the highest level since 2007, while the 10-year yield rose seven basis points to 3.95%.

Higher Rates: Pros and Cons

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 (read: 5 Most Heavily Shorted ETFs So Far This Year).

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.

The current situation has compelled investors to flock to RRH to protect themselves from the rising rate environment.

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

RRH in Focus

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 (read: Is Fed Rate Hike Worry Exaggerated? Top-Ranked ETFs to Play).

It is an actively managed fund and seeks 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 investment companies, including ETFs; and commodity futures and options.

Advocate Rising Rate Hedge ETF has accumulated $40.2 million in its asset base and charges 85 bps in annual fees. It trades in an average daily volume of 50,000 shares.

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