Consider Smart Beta ETFs for a Rising Rate Environment | Page 2 of 2 | ETF Trends

For instance, the previously active now turned passive ETF, iShares Edge U.S. Fixed Income Balanced Risk ETF (BATS: FIBR), will achieve three years of live performance on February 26 and is set to outperform the so-called Agg. Since its inception back in February 2015, FIBR has returned an annualized 2.54%, compared to the Agg’s 1.42% average return over the same period.

To achieve its performance, FIBR tracks the Bloomberg Barclays U.S. Fixed Income Balanced Risk Index, which includes corporate and mortgage securities taken from the broader Bloomberg Barclays U.S. Universal Index while targeting an equal allocation between interest rate and credit spread risk, so segments with lower credit spread volatility are given a higher weighting. The underlying index also further adjusts rate risk so that it equals credit spread risk by including long positions in U.S. Treasuries or short positions in Treasury futures.

The result is a portfolio that “aims to protect against rising rates by reducing the portfolio’s potential for concentrated interest rate risk,” according to BlackRock.

FIBR currently shows an effective duration of 4.83 years and a 2.84% 30-day SEC yield. The portfolio currently includes a -25.0% cash equivalent or derivatives hedge against rising rate risk and focuses on industrial, MBS pass through and financial institution debt securities. The portfolio’s smart beta indexing methodology may be a good way for bond investors to balance rate risk and their ongoing need for income.