A New ETF for Combating Rising Rates

Although interest rates remain near historic lows and the Federal Reserve appears to be taking a patient approach to raising rates, but that has not stopped investors from scouring the universe of exchange traded funds for rising rates protection.

ETF issuers are rushing to meet that demand with new products explicitly designed as protection against rising interest. The newly minted Sit Rising Rate ETF (NYSEArca: RISE), courtesy of New Jersey-based Sit Investment Group and ETF Managers Capital, brings institutional-level interest rate hedging to everyday investors.

One way to diminish interest rate risk is through taking an institutional approach. Specifically, fixed-income investors can utilize long-short bond strategies to diminish rate risk.

New types of  zero duration or negative duration ETFs hold long-term bonds, but they will short Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise – bond prices have an inverse relationship to interest rates, so rising rates corresponds with falling bond prices. [Fixed Income ETFs for a Rising Rate Environment]

With a negative 10-year duration, the idea is that a 1% rise in U.S. Treasury yields results in about a 10% rise in price. So the price moves nearly 10 times the change in yield. RISE is focused on the 2 and 5-year U.S. Treasury futures with a minor weighting in 10-year future, according to a statement issued by Rise.