RISR & FIXP Commentary for January 2025
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RISR Performance Summary
The FolioBeyond Alternative Income and Interest Rate Hedge ETF (ticker: RISR) returned 0.87% based on the closing market price (0.88% based on net asset value or “NAV”) in January. In comparison, the ICET7IN Index (US Treasury 7-Year Bond Inverse Index) returned -0.70% while the Bloomberg Barclays U.S. Aggregate Bond Index ("AGG") returned 0.52% 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, January be worth more or less than their original cost and current performance January 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 historically high volatility in interest rates continued in January. The 10-year Treasury bond yield reached its highest level since October 2023, topping out at 4.79%, before promptly reversing course and dropping by 25 bps to end the month at 4.54%, almost exactly where it started.
The immediate cause for the reversal in market trend was an inflation report that showed Producer Prices rising more slowly than had been anticipated on the 14th, and then a softer-than- expected Consumer Price report the following day. The move down in rates was further accelerated by certain technical factors including some widely watched moving average statistics. While the relief rally that occurred was fairly strong, there have been four significant rallies since the Fed started its rate hike cycle, and all of those have been more dramatic than this most recent move down in rates. And in each of those cases, the trend toward higher rates was re-established in fairly short order. In short, a dovish inflation report that shows inflation is still above the Fed’s target is hardly the harbinger of a sustained rally in rates that some seem to still be looking for.
This view was further supported by the Fed’s decision near the end of the month to make no change in the Fed Funds rate. Even more significantly, in his press conference following the announcement, Chair Jay Powell basically said that, barring some macro-economic shock, the consensus at the Fed is that rates were where they ought to be. While not ruling out further cuts at meetings later this year, he strongly suggested the market ought not to expect significant further rate cuts in the near term. For once Powell delivered a strong and consistent message.
Market Rallies in 10-year US Treasury Rates
We have all been subject to very high volatility in financial markets for the last several years. One way to see how truly remarkable this period has been is to look at volatility in a different way from the statistical standard deviation that is commonly used. Instead, we can look at the frequency of large moves, which in many ways is closer to the way many investors think about it. The graph below shows the 10-year treasury rates since 2000. The pale vertical bars indicate days where the price of the 10-year note moved (up or down) by a full point or more. There have been three episodes of heightened volatility in that time: the post-dot.com bubble in 2003-04, the great financial crisis of 2008-09, and the most recent period that began in late 2022 and continues to this day.
Source: Bloomberg, LP, author’s calculations.
In most years there are either no days or a small handful of days that see price moves of more than a point in the 10-year note. In 2024 there were 8, in 2023 16 and in 2022 there were 19 such big-move days. Those are the highest levels since 2008 and 2009 which saw 28 and 23 such days. We find this to be a very tangible and intuitive way to think about volatility. It highlights that we remain in a regime of heightened risk and that it still makes sense to keep durations in check.
RISR continued to see significant inflows of investor capital in January. More than $35 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”) was launched in January. The Fund 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. During the one week from the fund’s inception on January 23 through month-end, FIXP produced a return of 0.45% based on the closing market price (0.35% based on net NAV). We will have more to say about FIXP’s performance in the months ahead.
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.
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
Since taking office on January 20, the Trump administration has issued a flurry of executive orders, several of which have the potential to meaningfully affect financial markets. In addition, some of these policies represent a sharp change in direction from the prior administration. There is substantial uncertainty over many of these actions, including question about their legality or enforcement. US Presidents have a great deal of authority, but Trump, like countless of his predecessors, claims to have plenary powers over a broad range of policy arenas. Challenges to many of his actions have already begun.
One of the most potentially significant policies is Trump’s stated goal to reduce the authority of the Consumer Financial Products Board (CFPB), or even to eliminate it altogether. The CFPB was set up in the aftermath of the 2008 financial crisis, and has a control and financing structure that is unique among federal regulatory bodies—it receives funding directly from the Federal Reserve rather than via congressional appropriation, and there is considerable debate about oversight and governance. Prior CFPB heads have taken a very broad interpretation of the board’s authority to regulate a broad range of consumer products, including financial services such as credit cards, auto loans and mortgages. In addition, CFPB has from time-to-time tread into areas that agencies such as SEC view as their exclusive purview. Elimination or hamstringing the CFPB could make it easier for financial firms to offer products or services that previously would have faced greater scrutiny. If such products have more lax underwriting or more aggressive terms, this could result in higher delinquency and default rates over time. This may or may not be a trade-off worth making for the economy overall.
The new administration has stated repeatedly that it intends to impose high tariffs on US’s trading partners, including Canada and Mexico, notwithstanding the USMCA free trade agreement that was originally negotiated by the previous Trump Administration. The proposed magnitude and scope of the threatened tariffs seems to change almost daily, but the outlook seems to be for higher tariffs on a broad range of goods and trading partners. Economists disagree about the impact of tariffs on trade, and about who bears the bulk of the cost—consumers or producers. Regardless, the tariff confusion has added a great deal of uncertainty to financial markets about potential impacts on economic activity, jobs, inflation, interest rates and exchange rates. It is likely to be some time before any clarity can be had on this issue.
Another major policy shift is a newly positive attitude toward crypto-currency. In addition to appointing a prominent Silicon Valley businessman as “crypto-czar” the new administration including the newly appointed Secretary of the Treasury has expressed a much more constructive attitude towards digital currencies and related financial products than prior administrations. In particular, the resignation of Gary Gensler is a significant hurdle taken away because the former SEC chair was famously anti-crypto. Banks are now permitted to custody crypto-currencies, and it is reasonable to expect significant relaxation of the strict limits around crypto-related securities offerings.
President Trump also announced he wants to create a US Sovereign Wealth Fund. This is a rather strange goal, since SWFs are usually established by nations having a large surplus to invest. The US federal government, by contrast, is deeply in debt, and it is unclear how such an entity would be funded, or what its investment goals would be. The US government and the Federal reserve have historically avoided investing in instruments that could bring it into conflict with other broader societal goals and priorities. So, for example, except in times of crisis, neither the federal government nor the Federal Reserve invest in corporate debt or equity securities. A big focus for SWFs around the world today is private credit. An investment effort in that sector by a U.S. SWF would likely generate significant resistance by private market participants. Suffice to say, this may well be an unserious proposal, but if it is serious, it could have a significant impact on markets depending on size and investment focus.
The new Treasury Secretary Scott Bessent had been highly critical of his predecessor Janet Yellen’s policies around how to fund the existing massive and growing federal debt, now at more than $36 trillion and growing at a rate of almost $300 billion per month. Yellen had been financing a historically large share of that debt with short term financings including T-bills and short-term notes. This policy was undertaken to avoid putting pressure on longer term rates by issuing large volumes of long-term debt.
Before taking office, Bessent had been highly critical of this approach, as it forces the government constantly to be rolling large volumes of short-term debt at rates that could be volatile. Once in office, however, at Trump’s insistence, he pledged to continue Yellen’s refinancing framework with the goal of trying to reduce interest rates for 10-year and longer durations. It remains to be seen exactly how that will play out.
Finally, Trump has expressed support for a number of tax policy changes that taken together are somewhat incoherent. Besides the tariff proposal discussed above, he has proposed eliminating federal tax on certain types on income altogether (tips, overtime and Social Security benefits), reducing corporate taxes, especially for companies that manufacture in the US, removing the State and Local tax deduction caps he put in place in his first administration, and getting rid of the so-called carried interest loophole that mostly benefits wealthy investment managers. Projections about budget impacts are always fraught with uncertainty, but taken as a whole, the President’s tax proposals would add substantially to the existing debt, with unknown impacts on jobs and economic growth.
In sum, financial markets continue to face tremendous uncertainty that the election has only increased. We believe this uncertainty makes it exceedingly unlikely that interest rates will decline meaningfully this year and even into 2026. This is true regardless of whether one supports or resists the new administration’s goals. There is no serious constituency in the federal government—from either party—for any measures that would lead to lower spending and more fiscal responsibility.
Our views about debt and interest rates do not reflect a judgement about these choices. It is a dangerous mistake in investing to convince yourself that what you think should happen is what will happen. Instead, we observe the reality of economic and financial decision-making, and we allocate capital and manage risk accordingly. That is our goal with RISR. To provide investors who see what we see with a tool to manage these risks, and ultimately to profit from an allocation to this strategy. You may think the federal deficit is “too large” or “nothing to worry about” as a personal preference, but there is little doubt that at current and projected levels, it leaves little to no room for interest rates broadly to decline materially.
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. Economies in Europe and especially in China are in serious trouble. Democrats in Washington appear flat-footed in response to the onslaught of executive orders, and especially from the efforts from Elon Musk and the DOGE team to identify fraud, waste and abuse. But if history is any guide, they will find their voice and begin to organize resistance to the MAGA movement. In the meantime, 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 provides an attractive, thematic strategy that provides 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. 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 |
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 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.
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.