RISR & FIXP Commentary for February 2025
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RISR Performance Summary
The FolioBeyond Alternative Income and Interest Rate Hedge ETF (ticker: RISR) returned -1.01% based on the closing market price (-0.64% based on net asset value or “NAV”) in February. In comparison, the ICET7IN Index (US Treasury 7-Year Bond Inverse Index) returned -2.78% while the Bloomberg Barclays U.S. Aggregate Bond Index ("AGG") returned 2.20% during the same period.
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, February be worth more or less than their original cost and current performance February 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 that these distributions will be made.
Total Expense Ratio is 1.23%.
For standardized performance click here.
The volatility in financial markets took a leap higher in February. Both the bond market MOVE Index and the equity market VIX Index took near vertical upward trajectories during the month, as the uncertainty—one might say chaos—around the plans for tariffs consumed markets. The new presidential administration, which took office on January 20, quickly announced a series of historically significant trade policies, and then promptly whipsawed markets by issuing numerous contradictory statements regarding their scope and timing. Whether one supports or laments the underlying policies, the lack of messaging discipline clearly had an adverse effect on markets but domestically and overseas. Markets were particularly concerned about the potential for tariff-induced trade wars with Canada and Mexico, by far the US’s largest trading partners. Trade between the US and both of its neighbors includes very complex supply chains involving commodities as well as intermediate and finished manufactured products.
Volatility Indexes – MOVE (bonds) and VIX (stocks)
Directionally, the broad move in financial markets was risk-off. The SPX stock index fell by almost 5% peak-to-trough over the month, before a slight rebound in the final trading sessions. The move on long-term bond yields was even strong, with the 10-year treasury declining by 58 basis points from the high of mid-January, to end the month at 4.21%. This move, on top of the rate decline in January, completely reversed the 64 bp selloff that began last December.
10-Year US Treasury Bond Yield
In light of these large broad market moves, the -0.64% change in NAV for RISR during the month was quite modest. It amounts to an effective duration of around -2 years, which is less than half the negative duration that would be indicated by industry MBS IO pricing models. This continues a consistent pattern we have experienced since RISR’s inception that is referred to as “positive convexity.” This is a highly attractive attribute in any investment, wherein values increase more in accommodative markets, than they decline in adverse markets. The graph below illustrates this pattern well. RISR tends to increase strongly in line when rates rise as they did from September 2024 through mid-January 2025. Periods of falling rates, as in mid-2024 and so far this year, tend to see stable or modest declines in RISR. Achieving this type of performance is one of the reasons RISR has been ranked by Morningstar as the best-performing nontraditional bond fund among the 260 they track for the last three years.
Source: Bloomberg, LP, author’s calculations.
RISR continued to see significant inflows of investor capital in February. More than $10 million in new funds was received during the month. We are hopeful that this reflects a growing appreciation for how RISR can help investors manage volatility, and duration risk specifically, in a market that shows no sign of settling down to a calmer regime.
FIXP Performance Summary
FolioBeyond’s Enhanced Fixed Income Premium ETF (ticker: “FIXP”) seeks to provide income and, secondarily, long-term capital appreciation. The Fund invests in a portfolio of ETFs representing certain sectors of the fixed income market. In addition, the Fund seeks to generate additional income by writing options on these same ETFs, or other ETFs we believe have attractive prices and desirable correlation and volatility characteristics.
February was the first full month of performance since the Fund’s January 22 launch. For the month, FIXP returned 0.79% (0.74% based on NAV). Two offsetting factors produced this return: First, as noted above, interest rate declined meaningfully, and the yield curve flattened, while second, credit spreads widened by around 20 bp, based on the ICE BOA HY OAS Index. Credit spread still remain low relative to historical trends, but if policy uncertainty continues to increase, as further discussed below, one ought to expect continued widening.
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, February be worth more or less than their original cost and current performance February 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 that these distributions will be made.
Total Expense Ratio is 1.07%.
For FIXP standardized performance click here.
FIXP utilizes a quantitative model to allocate across all sectors of the fixed income market, using ETFs including: short-, medium- and long-term Treasuries, investment grade and high-yield corporates, commercial and residential mortgage REITs, municipals, bank loans, and others. The allocation model considers a number of factors that we believe drive returns for these sectors including risk-adjusted yield, volatility, correlation, momentum, liquidity and other factors. Typically, the model will make allocations to 4-8 ETFs from a pre-selected list of 24 sector ETFs. Allocations are checked daily, and rebalancing occurs as needed, but historically this occurs roughly every 60-90 days.
In addition to the ETFs, FIXP will write call options on its holdings, or other correlated securities, in order to generate additional income from option premiums. During February, these option positions did not contribute meaningfully to the Fund’s return, but this will vary from month to month.
The allocation model that FIXP uses has been running for private clients and model portfolios for more than three years, and we are very excited to be bringing this advanced algorithm to ETF investors. Please reach out to us to learn more and to obtain detailed information and fund documents.
Market Outlook
Over the past several years a series of buzzwords have come in and out of fashion to describe the economic and financial environment. Most notorious, perhaps, was the Federal Reserve’s use of the term “transitory” to describe a disturbing jump in inflation that was any but transitory. Like most inflations, the latest was caused by some one-time external shocks, but was principally caused by policy errors: in this case a massive ballooning of federal spending in response to Covid, and a monetary accommodation to that spending that was intended to finance it without a major increase in taxes. And like most inflationary episodes throughout history, inflation tends to be quite sticky once it gains a toehold, and the current experience is running true to form.
Once the Federal Reserve took serious notice of its policy errors, they embarked on a series of rate hikes with the goal of engineering a “soft landing.” The idea behind this buzzword was to try to bring inflation down without causing an outright decline in employment and economic activity. While there is little in the historical record to support the likelihood of success in this effort, the soft-landing meme gained a great many adherents in 2023 and 2024.
Unfortunately for the soft-landing proponents, 2025 is getting off to a rough start. A new buzzword is gaining traction, one that had gone out of fashion several decades ago. That buzzword is “stagflation,” which is a portmanteau of stagnation and inflation. This term first came into broad use in the 1970s to describe an economic environment that was previously thought to be impossible—until it actually happened. Under the standard economic models of the time, the so-called Keynesian model, contraction or very low rates of economic growth would be accompanied by falling prices. High rates of growth should produce rising prices, i.e. inflation. This demand-centered economic model didn’t have a way to explain simultaneous phenomena of economic contraction with wage/price inflation.
This belief was shattered in the 1970s during the administrations of Ford and Carter. Economist Aurthur Okun created the “misery index” which was the simple sum of inflation plus the unemployment rate. From the end of WWII until the 1970s this index typically ran in the area of 5-8%. In 1974 the index jumped to an unimaginable 19% and peaked at 22% in 1980. Only radical increases in interest rates by Paul Volker’s Fed reversed the course, but there was no soft landing, and the economy contracted significantly in response.
We are currently very far away from those sorts of levels for the misery index, which stands around 7% as of Q1 2025. But there is growing concern from this point as inflation proved to be stubbornly above the Fed’s 2% target while labor markets and household and business spending are all showing signs of stress.
Adding to the economic uncertainty is the chaotic (there really is no other word for it) series of policy pronouncements coming from the new presidential administration of Donald Trump. As we have discussed in previous commentaries, our assessment of public policy is not based on personal preference but on an analytical assessment of the likely outcome for the economy and financial markets. The primary source of uncertainty is around President Trump’s tariff policies, to the extent they can actually be ascertained. But many other policy changes are seemingly in play including taxes, regulations, industrial policy, and more.
The immediate result of this uncertainty has been a risk-off flight to quality. This, and not any downward revision in inflationary expectations is the driver behind the most recent drop in medium- and long-term interest rates. During periods of geo-political stress it is common for investors to sell things they thick are risky and buy things they believe can provide a safe haven. Historically the two main things they buy are Treasury bonds and gold. (Today, some people would add crypto-currency to that list.) Gold prices have recently hit all-time highs with a recent trajectory that is alarming if one believes gold prices can be a reliable indicator of investor concerns about the future.
Source: Bloomberg, LP
Inflationary expectations have also taken a turn for the worse. The recently released University of Michigan Surveys of Consumers saw 5-year median expectations for inflation of 3.9%, which is the highest reading since 1993 and a 0.9 jump from the end of 2024. The long sought-after soft landing is seeming ever more elusive to market participants.
UMich Expected Change in Prices During the Next 5-10 Years
Another worrisome development is the rate of consumer delinquencies on credit card and other debt has increased markedly since the Covid stimulus payments have largely been spent.
Source: Bloomberg, LP
Conclusion – Continued Volatility
There is rapidly growing realization among investors that the fiscal situation in the US, as well as other major economies, is perilous. The potential for a prolonged period of stagflation, perhaps less severe than the 1970s but still bad enough, is moving up the charts in terms of potential likelihood. Dip buying and market timing in such cases is a fool’s errand. We continue to urge investors to reduce their exposure to volatility generally. In particular, reducing the duration of your fixed income holdings remains paramount. Making big directional calls, especially in favor of a material bond market rally is highly risky.
Please contact us to explore how RISR and FIXP might fit into your overall strategy, to help you manage risk while generating an attractive current yield.
*Inception Date of 1/22/25
Portfolio Applications
We believe RISR and FIXP can provide attractive, thematic strategies that provide strong correlation benefits for both fixed income and equity portfolios. They can be utilized as part of a core holdings for diversified portfolios or as an overlay to manage the risks of fixed income portfolios. 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. Also, timing is on our side as the strategy generates current income if interest rates were to remain within a trading range. FIXP offers a broadly diversified exposure to multiple sectors of the fixed income markets in an algorithmically optimized manner.
Please contact us to explore how RISR and FIXP can be utilized as a unique tool to adjust your portfolio allocations in the current high volatility 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 |
This material must be preceded or accompanied by a prospectus. For a copy of the prospectus please click here for RISR and here for FIXP.
Investments involve risk. Principal loss is possible. Unlike mutual funds, ETFs 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 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 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.
The Morningstar Rating™ for funds, or "star rating," is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds and separate accounts) with at least a three-year history without adjustment for sales load. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk- Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. The Overall Morningstar Rating™ for a managed product is derived from a weighted average of the performance figures associated with its three-, five- and 10-year (if applicable) Morningstar Rating™ metrics. The weights are: 100% three-year rating for 36 - 59 months of total returns, 60% five-year rating/40% three-year rating for 60 - 119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. As of 9/30/2024, RISR was rated against the following number of Nontraditional Bond Funds over the following periods: 272 for the 3-year time period. RISR received 5 stars for those periods. Ratings for other share classes may differ. Past performance is no guarantee of future results.
FIXP Risks
Underlying ETFs Risks. The Fund will incur higher and duplicative expenses because it invests in underlying ETFs, including Bond Sector ETFs and broad-based bond ETFs (collectively, “Underlying ETFs”). There is also the risk that the Fund may suffer losses due to the investment practices of the Underlying ETFs. The Fund will be subject to substantially the same risks as those associated with the direct ownership of securities held by the Underlying ETFs.
Fixed Income Risk. The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to changes in an issuer's credit rating or market perceptions about the creditworthiness of an issuer. In general, the market price of fixed income securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities.
Option Overlay Risk. The Fund's use of options involves various risks, including the risk that the options strategy may not provide the desired increase in income or may result in losses. Selling call and put options exposes the Fund to potentially significant losses if market movements are unfavorable. The Fund may also experience additional volatility and risk due to changes in implied volatility (the market's forecast of future volatility), strike prices, and market conditions. The Fund may sell options on instruments other than the Fund's Bond Sector ETFs. This can expose the Fund to the risk that options can vary in price in ways that do not correspond to the Bond Sector ETFs held by the Fund, so called basis-risk.
Interest Rate Risk. Generally, the value of fixed income securities will change inversely with changes in interest rates. As interest rates rise, the market value of fixed income securities tends to decrease. Conversely, as interest rates fall, the market value of fixed income securities tends to increase.
New Fund Risk. The Fund is a recently organized management investment company with no operating history. As a result, prospective investors do not have a track record or history on which to base their investment decisions.
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 Inversed 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.
S&P 500 Index: The S&P 500 Index, or Standard & Poor's 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S.
IBOXHY Index: iBoxx USD Liquid High Yield Total Return Index measures the USD denominated, sub-investment grade, corporate bond market. The index includes bonds with minimum 1 years to maturity,
minimum amount outstanding of USD 400 mil. Bond type includes fixed-coupon, step-up, bonds with
sinking funds, medium term notes, callable and putable bonds.
Definitions
Alpha: a return achieved above and beyond the return of a benchmark or proxy with a similar risk level.
Annualized Equivalent Yield: represents the annualized yield based on the most recent month of income distribution: (income distribution x 12 months)/price per share.
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.
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.
Correlation: a statistic that measures the degree to which two securities move in relation to each other.
Coupon: is the annual interest rate paid on a bond, expressed as a percentage of the bond’s face value.
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.