RISR Commentary for March, 2022
Performance Summary
The FolioBeyond Rising Rates ETF (ticker: RISR) returned 2.89% based on closing market price (3.05% based on NAV) in March. In comparison, the ICET7IN Index (US Treasury 7 Year Bond Inversed Index) returned 3.39% while the Bloomberg Barclays U.S. Aggregate Bond Index ("AGG") returned -2.81% during the same time period.
As was the case in February RISR’s performance was primarily driven by a combination of correlation to rate increases, spread widening of Mortgage-Backed Securities (“MBS”), gains from security selection, and spread narrowing of MBS Interest Only Strips (“IOs).
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling 866-497-4963. Short term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Returns beyond 1 year are annualized.
A fund's NAV is the sum of all its assets less any liabilities, divided by the number of shares outstanding. The market price is the most recent price at which the fund was traded. The fund intends to pay out income, if any, monthly. There is no guarantee these distributions will be made.
Total Expense Ratio is 1.01%.
March Moves
March saw some of the sharpest moves in interest rates we have observed in some time. The largest moves were observed in the so-called “belly” of the curve, i.e., maturities from 2-10 years. There were brief episodes of inversions, which is when short term rates are above long-term rates. A widely watched indicator, the “2s/10s” spread, which is the difference between 2-year treasury yields and 10-year treasury yields, inverted intra-month, but ended the month just barely positive by less than 1 basis point. Many market observers view this as ominous, as 2s/10s inversions have frequently signaled an economic downturn in years past. In any case, the entire yield curve beyond 1-year T-bills is now firmly above 2%.
It will come as no surprise that we believe this trend will continue and may well accelerate.
What caused the massive selloff in bond markets? Quite simply, the Federal Reserve appears to have finally and fully embraced the reality that inflation is spiraling out of control. Whatever the reason for it—and there are plenty of culprits, including supply shocks arising from the pandemic, the seeming quagmire of the Russian invasion of Ukraine, and we would argue, longstanding US monetary and fiscal policies—it is clear to anyone willing to look, that we have a serious problem with rising prices.
On March 16, after years of accommodation, the Fed finally took the first tentative steps towards tightening policy with a 25 bp increase in the Fed Funds policy target. By then, to most observers this was a foregone conclusion, but it hadn’t been as recently as January or even early February.
What was more significant were the details contained in the accompanying press release which made it clear that the Fed’s board recognized exactly how far behind the curve they had fallen. The release emphasized that the overall judgement of the members was that a series of rate hikes had begun. It warned investors to expect rate hikes totaling at least 250 basis points, and since the official release several speeches given by Feb board members have suggested an even more aggressive series of rate hikes.
RISR is well positioned to benefit from such a hawkish Fed policy—indeed it is our base case forecast. During March we increased our AUM by almost 35%, ending the month at $30.1MM. We will continue to deploy our investors capital to assemble a portfolio of MBS IOs that is diversified with respect to geography, coupon, vintage and other key metrics.
Portfolio Applications
We believe RISR provides an attractive, thematic strategy that provide strong correlation benefits for both fixed income and equity portfolios. It can be utilized as part of a core holding for diversified portfolios or as an overlay to manage the interest rate risk of fixed income portfolios. Alternatively, RISR can be used as a macro hedge against rising interest rates with less exposure to equity beta and negative correlation to fixed income beta. The underlying bonds are all U.S. agency credit that are guaranteed by FNMA, FHLMC or GNMA. There is no financing leverage or explicit short positions that relies on borrowed securities. Also, timing is on our side as the strategy generates current income if interest rates were to remain within a trading range.
Please contact us to explore how RISR can be utilized as a unique tool to adjust your portfolio allocations in the current inflationary environment.
| Yung Lim | Dean Smith | George Lucaci |
|---|---|---|
| Chief Executive Officer | Chief Strategist and Marketing Officer | Global Head of Distribution |
| Chief Investment Officer | RISR Portfolio Manager | |
| ylim@foliobeyond.com | dsmith@foliobeyond.com | glucaci@foliobeyond.com |
| 917-892-9075 | 914-523-2180 | 908-723-3372 |
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (866) 497-4963 or visit our website at www.etfs.foliobeyond.com. Read the prospectus or summary prospectus carefully before investing.
Investments involve risk. Principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The fund is new and has limited operating history to judge fund risks. The value of MBS IOs is more volatile than other types of mortgage related securities. They are very sensitive not only to declining interest rates, but also to the rate of prepayments. MBS IOs involve the risk that borrowers may default on their mortgage obligations or the guarantees underlying the mortgage-backed securities will default or otherwise fail and that, during periods of falling interest rates, mortgage-backed securities will be called or prepaid, which may result in the Fund having to reinvest proceeds in other investments at a lower interest rate.
The Fund’s derivative investments have risks, including the imperfect correlation between the value of such instruments and the underlying assets or index; the loss of principal, including the potential loss of amounts greater than the initial amount invested in the derivative instrument. The value of the Fund’s investments in fixed income securities (not including MBS IOs) will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the value of fixed income securities owned indirectly by the Fund. Please see the prospectus for a complete description of principal risks.
Diversification does not eliminate the risk of experiencing investment losses.
Index Definitions
Bloomberg Barclays US Aggregate Bond Index: A broad-based benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency).
US Treasury 7-10 Yr Bond Inverse Index: ICE U.S. Treasury 7-10 Year Bond 1X Inverse Index is designed to provide the inverse of the daily return of the ICE U.S. Treasury 7-10 Year Bond Index (IDCOT7). ICE U.S. Treasury 7-10 Year Bond Index tracks the performance of US dollar denominated sovereign debt publicly issued by the US government in its domestic market. Qualifying securities of the underlying index must have greater than or equal to seven years and less than 10 years remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and an adjusted amount outstanding of at least $300 million.
Definitions
Alpha: a return achieved above and beyond the return of a benchmark or proxy with a similar risk level.
Basis Points (bps): Is a unit of measure used in quoting yields, changes in yields or differences between yields. One basis point is equal to 0.01%, or one one-hundredth of a percent of yield and 100 basis points equals 1%.
Beta measures: the volatility of a security or portfolio relative to an index. Less than one means lower volatility than the index; more than one means greater volatility.
Coupon: is the annual interest rate paid on a bond, expressed as a percentage of the bond’s face value.
Convexity: A measure of how the duration of a bond changes in correlation to an interest rate change. The greater the convexity of a bond the greater the exposure of interest rate risk to the portfolio.
CUSIP: An identifier number that stands for the Committee on Uniform Securities Identification Procedures assigned to stocks and registered bonds in the United States and Canada.
Duration: measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.
GNMA: Government National Mortgage Association
FNMA: Federal National Mortgage Association
FHLMC: Federal Home Loan Mortgage Corporation
Short Investment (Shorting): is a position that has been sold with the expectation that it will decrease in value, the intention being to repurchase it later at a lower price.
Distributed by Foreside Fund Services, LLC.