RISR Commentary for November 2023
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Performance Summary
The FolioBeyond Alternative Income and Interest Rate Hedge ETF (ticker: RISR) returned -2.05% based on the closing market price (-1.01% based on net asset value or “NAV”) in November. In comparison, the ICET7IN Index (US Treasury 7-Year Bond Inversed Index) returned -4.38% while the Bloomberg Barclays U.S. Aggregate Bond Index ("AGG") returned 4.53% 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, 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 0.99%.
For standardized performance click here
If anyone ever asks what a market “whiplash” looks like, show them the following chart of movements in the 10-year Treasury rate.
10-year US Treasury Yield
During November, interest rates sharply reversed course from the notable upward trend in place since the second quarter. The 10-year Treasury rate fell by more than 60 bps, which is the sharpest drop since December of 2008, during the Great Financial Crisis. Seen in that light, we are pleased to have only seen a negative return of 1.1% for the month, on a NAV basis. YTD, we were still up by more than 12%, which ranks well for domestic fixed income ETFs.
The reasons for the reversal in market rates are, as usual, an aggressive reading of a couple of economic indicators related to the labor market, compounded by more mixed messaging from members of the Federal Reserve. The month began with the Fed once again announcing they would hold the Federal Funds target at its current rate of 5.5%, where it has stood since the July board meeting.
The market took this as an “all-clear” sign on rates and inflation, despite a very modest change in the actual language of the Fed’s announcement, that added the word “if” to a statement regarding the potential future rate increases. Nevertheless, that small nuance was further amplified in a typically mealy-mouthed press conference from Chair Powell. Markets had been primed for any cracks in the inflation fighting resolve from the Fed, and in November they got it.
Over the remainder of the month, a handful of government data releases suggested a very modest cooling of the labor market. Both new and continuing jobless claims ticked up during the first two weeks of the month, but even this was partially reversed by month’s end. Likewise, job openings and wages showed a mix of declines and increases over the month. But in the current environment, all news that supports the “rate-cuts are coming” narrative is embraced, and contrary news is largely disregarded.
Capital inflows for the month were modest but continued the recent trend of growth in AUM. We believe this represents a growing appreciation for the benefits RISR can have for managing risk for fixed-income investors. We will continue to present this message to the market, as our goal is to convince investors that RISR is, or should be, a core holding for prudent fixed-income investors and managers looking to manage risk without sacrificing current income.
Outlook
As occurred in the Summer of last year, many market participants have decided that the Fed is done fighting inflation. That call was wildly premature then, and we think it is still premature. Some point to the slowing rate of growth in the macro-economy as evidence that the Fed will have to modify its oft-stated goal of bringing inflation fully back to its 2% target. Depending on which measure one looks at, we are currently somewhere around 3.5-4.0% on a year-over-year basis.
As the chart below shows, nominal GDP growth has slowed from the post-pandemic rebound, but at 6.35% of Q3 2023, it still is growing faster than it has for most of this century, excluding the pandemic bounce. That is a very far cry from a recessionary cliff. The only way to accurately describe the US economy broadly is “strong.”
As a result, we continue to believe it will be a very long time before the Fed moves off its current stance of higher-for-longer. It is sometimes said that “the Fed raises interest rates, but the market lowers them.” Like many market aphorisms, there may be some historical truth in that expression. But responsibly managing investor assets requires more than slogans and catchy phrases.
The volatility in the market is still highly elevated. Next year is a presidential election, and with the apparent selection of candidates, it is likely to be particularly nasty, which further exacerbates uncertainty and market risk. We do not think it is appropriate sound the “all-clear.” Indeed, we believe investors with a time horizon measured in quarters and years rather than weeks or months, should be prepared for a bumpy ride. Risk management continues to be the correct posture. Managing credit exposure and duration ought to remain top priorities.
We constantly look for opportunities to add negative duration, thereby increasing the hedge value of the Fund. However, given the current market environment, and the balance of risks toward rates that are “higher for longer” vs. sharply lower rates, we are very comfortable with the current portfolio. We are happy to speak with any investors seeking more detailed information regarding our holdings and risk/reward profile.
Please contact us to explore how RISR might fit into your overall strategy, to help you manage risk while generating an attractive current yield.
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. 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 |
This material must be preceded or accompanied by a prospectus. For a copy of the prospectus please click here.
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 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.
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