As markets brace for a rising interest rate environment, bond investors should begin to look to alternative investments, such as a strategic interest rate-hedging exchange traded fund, to limit the negative effects or even benefit from rising rates.
Specifically, fixed-income investors can utilize long-short bond strategies to diminish rate risk. The Sit Rising Rate ETF (NYSEArca: RISE) brings an institutional-level interest rate hedging strategy to everyday investors.
RISE is a “strategic interest rate hedging tool that gives investors the opportunity to benefit from the rise in the interest rates of U.S. Treasury notes,” according to Sit Investment Group.[related_stories]
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.
Negative duration ETFs try to profit off a rising rate environment by heavily using short contracts to capitalize on falling bond prices if rates do rise. However, due to the more aggressive nature of this strategy, these types of ETFs will underperform if rates fall.
With a negative 10-year duration, investors may find that a 1% rise in U.S. Treasury yields results in about a 10% rise in RISE’s price. So the price moves nearly 10 times the change in yield. Duration is a measure of a bond funds sensitivity to changes in interest rates.
RISE is focused on the 2- and 5-year U.S. Treasury futures, which make up about 30% to 70% of the fund’s portfolio, with a minor 5% to 25% weighting in 10-year Treasury instruments.
For more information on the fixed-income space, visit our bond ETFs category.
Sit Rising Rate ETF