RISR & FIXP Commentary for March 2025
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RISR Performance Summary
The FolioBeyond Alternative Income and Interest Rate Hedge ETF (ticker: RISR) returned 0.88% based on the closing market price (0.72% based on net asset value or “NAV”) in March. In comparison, the ICET7IN Index (US Treasury 7-Year Bond Inverse Index) returned -0.40% while the Bloomberg Barclays U.S. Aggregate Bond Index ("AGG") returned 0.04% 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, March be worth more or less than their original cost and current performance March 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.
There was a great deal of “churn” in financial markets during March, as investors awaited the Trump administration’s long-anticipated announcement on tariffs that was set for April 2. They avoided April 1 announcement so there would be no mistaking the tariff terms for an April Fool’s Day joke, which didn’t exactly inspire confidence in the ultimate announcement.
Long-term interest rates traded in a 20 basis point range between 4.16% and 4.36% on the 10-year Treasury bond, with a total of nine directional reversals over the course of the month. RISR’s price performance during the month was likewise range-bound, trading between 36.29 and 36.81.
Despite interest rates ending the month modestly lower, RISR’s performance was helped by a modest steepening of the yield curve. Maturities from 2-5 years fell by around 13-14 bps in yield, while the 10-year declined only 10 bps and the long bond dropped 5 bps. A steepening yield curve tends to improve the value of the MBS IOs RISR holds, because it tends to suppress prepayment rates, even as it reduces the financing costs of loan originators and servicers. Additionally, lower short term rates improve the present value of short dated MBS cash flows. This steepening trend has been in place for several quarters, and has helped the YTD performance of RISR, even though the absolute level of rates has generally fallen.
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.
March was the second full month of performance since the Fund’s January 22 launch. For the month, FIXP returned -0.67% (-0.64% based on NAV). This was driven largely by a decline in the value of our position in REM (-5.3%), the iShares Mortgage Real Estate ETF. REM holds shares in mortgage REITs [1], including residential and commercial real estate interests. Mortgage REITs have been hit especially hard in recent months due to growing concerns about credit and concerns over the amount of leverage they often employ. This has occurred despite the fact that REM holds large positions in agency mortgages which are typically not subject to the kinds of credit risks that affect non-agency and commercial mortgage loans. Nevertheless, in March REM accounted for roughly 42% of the decline in FIXP despite it being only a 10% position, and despite the trailing 12-month dividend yield of around 10.38%. FIXP’s allocation model includes default-adjusted credit spreads as an important variable, which may affect FIXP’s future allocation to REM if there is no offset to that specific risk factor.
The remainder of FIXP’s holdings (aside from RISR which was up on the month, as discussed above) were down between 1.25% and 1.78%, which is far better than the broad equity market which was down around 5.75% if one looks at the S&P 500 as a benchmark. Thus, despite a down month in absolute terms, FIXP still would have cushioned a balanced portfolio of equity and fixed income holdings.
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, March be worth more or less than their original cost and current performance March 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 its ETF holdings, FIXP also writes options to generate additional income from premiums received. In March, that amounted to a positive contribution to total returns of around 12.5 bps or 1.45% annualized.
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
The Return of Stagflation: A Looming Economic Threat
There is a famous expression among economic observers: “Economic expansions don’t die of old age, they are murdered.” Historically, these “murders” have usually been executed by external shocks, such as the oil crises of the 1970s. Today, it appears that a similar crime is unfolding, with troubling parallels to the stagflationary era of the 1970s. A combination of persistent inflation, erratic trade policies, and global market volatility is threatening to plunge the U.S. economy into a dangerous period of slowing economic growth and persistent rising prices.
For the past three years, the Federal Reserve has been battling inflation that was largely caused by an unprecedented surge in federal spending and transfer payments under the previous administration. Unfortunately, the Fed was slow to act to counter this extraordinary fiscal stimulus, allowing inflation expectations to become deeply entrenched. While some recent reports show slowing inflation, these are misleading signals regarding future trends. Indeed, U.S. households’ five-year inflation expectations have rebounded after a period of post-Covid moderation.
Meanwhile, the Trump administration’s tariff policies have added fuel to the inflation expectations fire. The chaotic on-again/off-again, and constantly retargeted tariffs have created extraordinary market volatility. Tariff announcements are happening so quickly that they contradicted and undermined the live testimony of the US Trade Representative even as he was speaking before Congress. Businesses and consumers scrambling to adjust their plans. These erratic moves have undermined confidence in U.S. economic leadership and contributed to wild swings in equity and fixed-income markets. Even safe-haven assets like U.S. Treasury bonds have seen their status called into question, while gold prices continue to hit new all-time highs.
This toxic mix of slowing economic activity and persistent inflation has revived fears of stagflation—a term coined in the 1970s to describe a grim scenario of falling employment and output coupled with rising prices. Many economists had believed that such a scenario was relegated to history, thanks to lessons learned during Paul Volcker’s tenure as Federal Reserve Chair when he raised short-term interest rates above 20% to combat inflation. Yet here we are again, facing a similar threat.
While some of the administration’s supporters hailed these seemingly random pronouncements as strategic maneuvers straight out of “The Art of the Deal,” others saw them as poorly conceived gambits that ultimately weakened America’s hand. We don’t see it that way. That is not a political judgment, but a policy assessment. Tariffs raise final prices. Full stop. Economists get into esoteric debates about the incidence of those price increases. In the end, it really doesn’t matter. If the tariffs that have been announced (despite a 90-day “pause”) actually go into effect, consumers and businesses will be paying higher prices for most everything. International supply chains are that inter-connected.
The broader implications of these tariff policies extend beyond consumer goods. China holds significant leverage over critical supply chains, such as rare-earth components essential for advanced technologies like aircraft, electronics and pharmaceuticals. Additionally, China remains one of the largest foreign holders of U.S. Treasury bonds—a position that could be weaponized if tensions escalate further. Meanwhile, America has far less leverage on China that it may imagine. China’s GDP is some $17 trillion, and its total exports to the US are only around $440 billion. China has been diversifying its export markets for decades.
Global confidence in U.S. financial markets has been shaken. The US dollar has declined sharply against other global currencies. A weaker dollar further exacerbates inflationary pressures by increasing the cost of imports, while higher bond yields raise borrowing costs for both the government and private sector. Businesses are already starting to scale back investment plans and households are beginning to tighten their belts. Unfortunately, recent comments from Federal Reserve Chair Jay Powell describing current inflationary pressures as “transitory” do little to inspire confidence that decisive action is forthcoming. Meanwhile, gold climbs ever higher.
Conclusion – Continued Volatility
The current situation is not good. Any hopes for a coherent, well thought-out trade policy have been thoroughly dashed. Uncertainty rules and that means businesses and households will pare back spending. That means lower business investment and lower employment. The potential for a prolonged period of stagflation is growing. 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. There have been several “false Springs” in recent quarters. We strongly urge investors not to make big directional calls, especially in favor of a sustained bond market rally that we believe is unlikely.
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.
[1] A REIT is a Real Estate Investment Trust, which is a special type of fund that holds real property or debt backed by real property and receives certain tax benefits as long as it distributes essentially all of its income as a dividend.
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. Please read the prospectus carefully before investing.
RISR Risks
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.
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.