RISR Commentary for November 2024
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Performance Summary
The FolioBeyond Alternative Income and Interest Rate Hedge ETF (ticker: RISR) returned 0.28% based on the closing market price (-0.05% based on net asset value or “NAV”) in November. In comparison, the ICET7IN Index (US Treasury 7-Year Bond Inverse Index) returned -0.41% while the Bloomberg Barclays U.S. Aggregate Bond Index ("AGG") returned 1.06% during the same period.
Following its somewhat surprising 50 basis point cut in October, the Fed cut the Fed Funds rate by an addition 25 bps on November 7. Initially the market had almost no reaction to this, but following the release of the Fed minutes from its prior meeting rates declined meaningfully in the holiday-shortened final week. The 10-year Treasury which was sitting at 4.42% on November 21, had fallen to 4.17% by month end. The minutes revealed a balanced consensus among the Fed board members that inflation was within range of the ultimate 2% target, while economic activity remained reasonably robust.
Additionally, the market seemed to be gaining confidence that incoming President Trump ought to be taken “seriously, but not literally” with respect to previous statements regarding tariffs, etc. that would seem on their face to be inflationary. (See, below.)
Following the Fund’s 3-year anniversary and receipt of the Morningstar 5-star rating in October for the overall period ending 9/30/2024, in the Nontraditional Bond Funds category, out of 272 investments based on Morningstar risk adjusted return, we saw significant capital inflows during the month. Total fund assets grew by 32% during November, from around $50 million to around $65.5 million. We are hopeful this trend may continue. Since hitting these milestones, we have experienced a good amount of inquiry from firms and platforms that have expressed interest in RISR previously, but needed a 3-year track record to invest. We continue to have positive engagement with such parties.
In prior communications we have usually focused on returns, but it is worth taking a closer look at another aspect of fund performance. That is the correlation [1] between RISR and important benchmarks that investors use to gauge risk in their holdings. Correlation between holding in a portfolio is an important measure of overall risk because it indicates the extent to which different positions offset or reinforce market movements, which can reduce or increase overall portfolio risk. Most investors actively look for investments that have low or negative correlation to their other core holdings, because this will tend to reduce total risk of the overall portfolio.
The table below shows the return correlation between RISR and some important benchmark indexes [2]:
As the table shows, RISR has exhibited a low or negative correlation to important investment benchmarks. For instance, the correlation between RISR on the S&P 500 is -0.129. The correlation to the tech-heavy Nasdaq 100 is even lower at -0.116. By the standard most professional investor use, this is a very low correlation and suggests that adding RISR to a portfolio holding either of two broad stock market indexes could materially reduce overall risk. Turning from equities to bonds, RISR’s correlation to the Bloomberg Aggregate Index at ‑0.589 indicates a strong inverse relationship between returns from RISR and the broad fixed income market. A similar degree of negative correlation has been observed for long term (20+ years) and intermediate term (7-10 years) Treasury bond indexes.
These are highly desirable correlation characteristics for a broad range of investors, many of whom hold balanced portfolios containing a mix of equity and fixed income assets, including but not limited to the classic 60/40 stock/bond blend favored by many financial advisors. Including RISR in such portfolios can meaningfully reduce risk, while not sacrificing yield. RISR’s current yield of [7%], far exceeds the current yield for any of the indexes in Table 1, which range from a high of 3.97% for the 20+ year treasury index, to a low of 0.58% for the Nasdaq 100.
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, November be worth more or less than their original cost and current performance November 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 1.23%.
For standardized performance click here.
[1] Correlation is a statistical measure of the tendency for two variables to move in a similar or dissimilar manner. A correlation close to 1 implies a strong tendency to move in the same direction and similar magnitude; a correlation near -1 suggest a strong tendency to move in the opposite direction; a correlation near 0 indicates little or no measurable tendency one way or the other.
[2] See appendix for index definitions.
Market Outlook
The seemingly interminable presidential campaign came to a conclusion in November, with a resounding victory by Donald Trump, specifically and the Republican party, generally. Republicans held onto control of the House and took back control of the Senate. This, combined with a Supreme Court dominated by conservative justices, means that for at least the next two years, the Republican party will have near total control of Washington, aside from the permanent federal bureaucracy. But even that regulatory blob is to be placed under renewed scrutiny by the so-call “Department of Government Efficiency”, or “DOGE.” The DOGE is not an official government entity, but merely an advisory group, that has no authority to make policy or enact reforms. The entity, which is to be run by tech entrepreneurs Elon Mush and Vivek Ramaswamy, seems likely to suffer the fate of countless earlier such bodies. It will attempt to “name and shame” egregiously wasteful or sclerotic government practices and bodies. But, if history is any guide, in the end very little actual reform is likely to result from its efforts.
There have been similar efforts throughout US history including the William Howard Taft’s Commission on Economy and Efficiency, the Keep Commission under Theodore Roosevelt, Ronald Reagan's appointment of industrialist Peter Grace to lead the Grace Commission, and Clinton Vice President Al Gore's National Partnership for Reinventing Government, among countless other lower profile efforts. Generally, the federal bureaucracy has grown without pause, despite such commissions.
The reality is that much of what observers consider wasteful government spending is actually fully sponsored and supported by some member or members of Congress. All sorts of wasteful or self-serving activities arise from specific legislative mandates from some Representative or Senator who thinks it will benefit his or her district or state, and/or his or her re-election prospects. Everyone is against waste, fraud and abuse—except for the waste, fraud and abuse they believe benefits them directly.
It is theoretically possible, however, for a few areas DOGE may focus on to have some impact on financial markets. First, the Consumer Financial Protection Board (CFPB) has been mentioned as an unnecessary agency, whose responsibilities duplicate or overlap with other more longstanding regulatory bodies. It is certainly true that it has been a major thorn in the side of financial institutions large and small, since it was established as part of Dodd-Frank 2010 in the wake of the financial crisis of 2007-08. CFPB has put pressure on mortgage and consumer lenders to adopt practices it deems more borrower friendly. The CFPB has been challenged by its unique staffing and funding provisions that seem to put it outside the direct control of either the Executive or Legislative branches. Despite this, the Supreme Court has allowed it to continue to operate, albeit with some modifications to its operations. It seems unlikely that the agency could be eliminated entirely without a major battle in Congress, but DOGE may be able to suggest tweaks that the president could implement to reduce its ability to harass and cajole lenders and other financial intermediaries.
Second, the SEC has also been targeted by Musk and Ramaswamy as overstaffed and bloated. Indeed, head count at the agency has grown significantly over the last 10-15 years. There may also be a personal grudge at play, since the SEC and Musk have tangled repeatedly over the years, in particular over Tesla and statements made by Musk, that the SEC deemed outside the bounds of compliance for the CEO of a publicly traded company. Having said that, Musk’s chief antagonist, SEC head Gary Gensler has announced his resignation from the SEC effective on inauguration day. This is not particularly unusual. Agency heads often resign when a new administration takes over, unless specifically asked to stay on by the incoming president.
However, two other SEC commissioners have terms that expire relatively soon, and so Trump/Musk may have an opportunity to shape a very different SEC early in his term, one that could be much friendlier to Wall Street and businesses, with perhaps less emphasis on investor protections. This is especially true with respect to crypto-currencies. Gensler has been a harsh critic of crypto, and has used the SEC to stymie countless would-be crypto ventures on the grounds that such activities constitute securities offerings, subject to strict SEC oversight. While this ought not to affect traditional fixed income markets directly, it could be a harbinger of a more relaxed regulatory stance with respect to a wide range of financial markets activities.
Despite the potential for such modest bureaucratic changes, it is a fair bet that whatever comes out of DOGE is unlikely to have a meaningful impact on the budget, taxes or market conditions.
Tariffs
Incoming President-elect Trump announced a significant escalation in his proposed tariff campaign last month, when he proposed across the board 25% tariffs on the US’s major trading partners—Canada and Mexico.
The reaction from both countries was swift and unambiguous: such tariffs would be devastating to both economies and must surely be avoided. Within 24 hours the political leaders of both Canada and Mexico made statements to the effect that all measures would be taken to avoid the imposition of such punishing tariffs. Mexico’s initial response was more bellicose and less accommodating than Canada’s. But leaders from both countries clearly understand that such a regime cannot be allowed to occur. Moreover, it would be a direct violation of the USMCA, a tri-party trade compact that has been in place since 2020, when it replaced NAFTA.
As we discussed previously, a tariff is a tax on imports. Given the undeniable importance of both Canada and Mexico to US industry and consumer products, in particular agricultural products and commodities, a 25% across the board tariff would be highly inflationary in the US, and economically disastrous for both Canada and Mexico.
It is perhaps for this reason markets seem to be heavily discounting the potential for this particular tariff plan to actually be implemented. Trump’s stated goal for these tariffs is to stem the flow of illicit drugs and immigrants from both countries into the US. In other words, these are non-economic goals, as distinct from the tariffs aimed at China which are intended to achieve specific economic goals with respect to industrial production and supply chains. Tariffs would seem to be a blunt tool to achieve such goals, but it has surely gained the attention of both Canada’s Trudeau and Mexico’s Sheinbaum, which was perhaps the intention all along.
Conclusion – More Volatility
From an economic and financial standpoint, the presidential and congressional elections have done little to reduce future volatility. Democrats have not yet publicly put forth a coherent plan to counter Trump’s impulses. It may be they are still internalizing the thumping they took at the ballot box, and have not yet coalesced about party leadership and priorities. But eventually, the dust will settle, and the policy battles lines will become more clear. In the meantime, we continue to urge investors to reduce their exposure to volatility generally. Picking tops and bottoms in an environment like this is foolhardy.
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. 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 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.
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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