ETF Trends’ CEO Tom Lydon discussed the Simplify Interest Rate Hedge ETF (PFIX) on this week’s ETF of the Week podcast with Chuck Jaffe on the MoneyLife Show.

The Simplify Interest Rate Hedge ETF seeks to hedge interest rate movements from increasing long-term interest rates. The fund also benefits from market stress when fixed income volatility increases, while still providing the potential for income. PFIX utilizes an institutional-level strategy while bundling it in an ETF wrapper that provides both attractive liquidity and tax efficiency.

PFIX holds a large position in over-the-counter (OTC) interest rate options with the intention of providing a direct and transparent convex exposure to large upward moves in interest rates as well as interest rate volatility. By using OTC derivatives which are typically only available to institutional investors, the fund is similar to owning positions in long-dated put options on 20-year U.S. Treasury bonds. Because the option is held over a longer duration, PFIX is able to provide a transparent and simple interest rate hedge.

Why This Fund Is Positioned Positively Right Now

The Fed is currently looking at the potential of three interest rate increases next year, according to the “dot plot.” Interest rate increases are typically bad news for bonds, and with an increasing amount of the population hitting retirement and relying on the traditional 60/40 portfolio, finding reliable income from the 40 portion is going to potentially become a lot more difficult in 2022, Lydon explains.

PFIX is an ETF that has a very specific place that relies on certain conditions; the fund launched in May and hasn’t been a strong performer since launch because the focus at the time was more on the economy and less on inflation. Now, however, “the inflation numbers look more severe than many people thought,” Lydon says, and with more aggressive tapering of bond purchases by the Fed and interest rate increases coming in 2022, bonds are set to be hit particularly hard.

So where does this ETF fit, exactly? “Offsetting that portion of your fixed income portfolio that are non-specific bonds or underlying bonds that are held to maturity is a great way to hedge your fixed income portfolio, and here’s the tool to do it,” Lydon explains.

Listen to the Full Podcast Episode on PFIX:

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