RISR Commentary for Q4 2021
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Performance Summary
The FolioBeyond Rising Rates ETF (ticker: RISR) returned 0.24% based on closing market price (-1.17% based on NAV) from inception on September 29, 2021 to year-end 2021. In comparison, the ICET7IN Index (US Treasury 7 Year Bond Inversed Index) returned -0.53% while the Bloomberg Barclays U.S. Aggregate Bond Index ("AGG") returned 0.01% during the same time period.
Since the inception of RISR, the 10-year Treasury yield has declined by 3 basis points to 1.52% as of year-end. Intra-quarter, the volatility was higher as the yield oscillated within a 33 basis point range. At the short end of the yield curve, the 2-year Treasury yield climbed by 43 basis points to 0.73%.
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 1.01%.
Overview of Investment Strategy
RISR is designed to offer a thematic strategy tied to rising interest rates while providing correlation benefits for broad fixed income and equity portfolios. The portfolio provides exposure to a combination of Mortgage-Backed Securities Interest Only Strips (“MBS IOs”) and Treasuries with a duration target of approximately negative ten years. This bearish bond market exposure may also generate current income. Agency MBS IOs have been used by various types of institutional investors for over 30-years to seek to manage duration risk, potentially enhance current income and add correlation benefits to fixed income portfolios. RISR is one of the first ETF products that brings to ETF investors exposure to this unique subsector of the fixed income market managed with robust portfolio and risk management oversight. While it serves as a timely thematic strategy given the current stance of the Federal Reserve (Fed) along with the backdrop of high inflation, strong economic growth, and low unemployment rate, the exposure may also provide good diversification benefits over long holding periods.
Risk/Return Profile
RISR is anticipated to provide returns that are primarily driven by moves in the 10-year Treasury yield and current coupon MBS yield. MBS IOs are created by stripping out the interest cash flows from underlying agency (FNMA, FHLMC, GNMA) mortgage-backed securities. These MBS IOs trade like other fixed income securities based on CUSIPs and come in a variety of flavors including coupon rate, age, geographic concentration, borrower type, etc. As interest rates rise, the rate at which the underlying mortgage borrowers prepay their mortgages historically has declined, in turn potentially increasing the value of future interest rate payments. Conversely, falling interest rates may cause prepayment speeds to increase, possibly reducing the value of MBS IOs. If interest rates don’t change, the portfolio may generate current income that will vary depending on actual monthly prepayment rates. In order to manage the high negative duration of MBS IOs, Treasury positions are added to the portfolio to bring the duration down to approximately minus ten years, which is roughly equivalent to shorting 10-year Treasury bonds.
Given the variety of MBS IOs in the marketplace, our portfolio and risk management process filters the available types of securities and manages a diversified portfolio consisting of different coupon rates, age and loan level characteristics. Convexity risk is managed to avoid riskier MBS IO securities. Additionally, the underlying collateral characteristics are reviewed to avoid mortgage pools with high geographic concentrations risk, investor loans and other attributes that lead to unexpected prepayment volatility.
Portfolio Applications
There are various ways RISR can be utilized in a portfolio context. Below are some possible applications:
Duration Management: Adding RISR may reduce the overall fixed income portfolio duration without incurring the cost of shorting Treasuries or buying put options. Depending on the desired overall duration target, an appropriate amount of RISR can be added without selling off existing bond positions.
Macro Hedge: Utilize RISR as a thematic strategy that is less exposed to equity beta and may offer protection against the impact of inflation and rising rates for both equity and fixed income portfolios.
Diversifier: RISR offers exposure to this unique MBS IO asset class managed to prudent risk targets and provides long term correlation benefits for many types of diversified portfolios.
Please contact us to explore how RISR can be utilized to meet your portfolio goals in light of the current market 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 |
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (866) 497-4963 or visit our website at www.etfs.foliobeyond.com. Read the prospectus or summary prospectus carefully before investing.
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 Inverse 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.
Definitions
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.
Coupon: is the annual interest rate paid on a bond, expressed as a percentage of the bond’s face value.
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.
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.
Put Option: (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security at a predetermined price within a specified time frame.
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.