- Recent U.S. economic data is arguably supportive of more rate hikes
- If higher interest rates occur, investors in ETFs have myriad options for hedging fixed income portfolios
- An example is RISE, which is designed so that investors benefit when the Federal Reserve raises rates
Plenty of fixed income investors and fund managers are fretting about the impact of higher interest rates and exactly when the Federal Reserve will employ more hawkish measures. Recent U.S. economic data is arguably supportive of more rate hikes with the next coming perhaps as soon as the Fed’s next meeting.
Investors in exchange traded funds have myriad options for hedging fixed income portfolios against higher interest rates. Some new types of zero duration or negative duration ETFs hold long-term bonds, but they will take short positions in Treasuries or Treasury futures contracts to hedge against potential losses if interest rates rise.
The Sit Rising Rate ETF (NYSEArca: RISE) is another idea to consider when preparing for higher interest rates.
“RISE is designed so that investors benefit when the Federal Reserve raises rates. It’s different from funds that have negative durations because it primarily shorts the shorter end of the yield curve (2-5 years), which is the spot most directly affected by a rate hike. Since Treasuries have climbed and rates fallen in the past year, the fund is down more than 5% in that time,” reports Amey Stone for Barron’s.
RISE, which is just over a year old and has nearly $20 million in assets under management, “seeks to profit from rising interest rates by tracking the performance, before fees and expenses, of a portfolio (the “Benchmark Portfolio Index”) consisting of exchange traded futures contracts and options on futures on 2, 5 and 10-year U.S. Treasury securities weighted to achieve a targeted negative 10 year average effective portfolio duration,” according to issuer Sit Fixed Income Advisors II, LLC.
Duration is a measure of sensitivity of the price of a fixed-income asset to changes in interest rate risks, so a a low duration would translate to a smaller sensitivity to shifting rates.
Bryce Doty, portfolio manager at Sit Investment Associates, tells Barron’s “investors who like the concept should buy it well ahead of a Fed hike. Rates usually start moving up well ahead of an actual move in the fed funds by the Federal Open Market Committee. The best way to think of a fund like RISE is ascollision insurance.”
Sit Rising Rate ETF