A Rate-Hedging ETF Strategy Climbs on an Aggressive Fed Policy Outlook | ETF Trends

As the Federal Reserve exhibits an increasingly hawkish stance on its monetary policy outlook, an interest-rate hedging exchange traded fund strategy has been climbing.

Among the better-performing non-leveraged ETFs of Thursday, the Simplify Interest Rate Hedge ETF (PFIX) rose 5.3%. PFIX has increased 17.7% over the past month and advanced 35.3% year-to-date.

“I guess we have a little bit of a hangover from the FOMC minutes,” Oanda analyst Edward Moya, told the Wall Street Journal, adding that investors are trying to get a better sense of where the economy is going and how that affects the Fed’s monetary policy.

Federal Reserve officials in March “generally agreed” to cut down $95 billion per month from the central bank’s balance sheets in a bid to tackle surging inflation, Reuters reports.

“I do think we have to move forthrightly in order to get the policy rate up to the right level to deal with inflation that we’ve got in front of us,” Federal Reserve Bank of St. Louis President James Bullard told reporters after a speech Thursday.

Minutes of the Fed’s latest March 15-16 meeting revealed growing concern among policymakers that inflation is taking a stronger foothold in the economy, which contributed to not only a hike in its target policy rate by a quarter of a percentage point from its near-zero level but also to “expeditiously” raise it to a “neutral posture” at an estimated 2.4%.

“Many” Fed officials also supported rate hikes of half-percentage-point increments in policy meetings ahead to bring prices elevated consumer prices back under control, according to the latest minutes.

Investors are only beginning to come to terms that the Federal Reserve could be acting more aggressively in the year ahead.

“It’s almost like the market had a sudden epiphany that the Fed is tightening,” Stifel equity strategist Barry Bannister told the WSJ.

As investors try to react to changes in the monetary policy outlook, some have turned to PFIX, which seeks to hedge interest rate movements by 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.

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