FolioBeyond, an asset management company that utilizes artificial intelligence and algorithms along with machine learning tools for building portfolios, has partnered with Tidal ETF Services, a multi-manager ETF platform, to launch the Folio Beyond Rising Rates ETF (RISR). RISR, announced in the press release, seeks to provide income while also protecting against rising interest rates and can be used as a hedge against rising rates by both retail investors and institutions.
“Investors including RIAs, endowments, insurance companies, family offices, asset managers, mortgage originators, pension funds, and individuals will be able to utilize this ETF,” said Dean Smith, chief strategist and portfolio manager for RISR.
The offering of this fund comes at a time when inflation could be poised to increase in the economy.
“The global pandemic has extended a long-term macro environment where interest rates are extremely low and appear asymmetrically skewed toward higher rates in the future,” said Yung Lim, CEO of FolioBeyond. “Most rising rate protection strategies are expensive and exhibit negative carry. RISR employs a positive carry strategy that looks to benefit from secularly higher interest rates and could attract significant interest from a broad range of institutions and retail investors.”
RISR Hedges Against Rising Interest Rates
The Folio Beyond Rising Rates ETF (RISR) is actively managed and seeks to provide protection against rising interest rates while also creating income under stable interest rates.
RISR invests mainly in interest-only mortgage-backed (MBS IOs) securities that are fixed income instruments representational of interest within a pool of mortgages; it only invests in funds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Administration. The fund also invests in U. S. Treasury bonds.
The fund seeks to maintain a duration of negative 10 years, reflecting an environment in which prices are increasing as interest rates rise. As interest rates rise, fewer borrowers tend to prepay on their mortgages and the cash flow from interest accumulated on aggregate mortgage principal balances increases. To achieve that targeted duration, the fund can invest in MBS coupon swaps as well as MBS inverse IOs, bond options, and swaps.
The fund is also positioned so that any reduction in interest rates that would adversely affect the mortgage-backed securities is potentially offset by gains by the U.S. Treasury allocation. The sub-adviser, FolioBeyond, uses a top-down and security-specific process to analyze the securities being invested in.
RISR has an expense ratio of 1.01%.
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