The U.S. Federal Reserve doesn’t appear to be relenting when it comes to tightening monetary policy. As such, rising interest rates appear to be on the agenda through the rest of 2022, which is already having a profound effect on the mortgage industry.
“Mortgage demand fell more than 6% last week compared with the previous week, hitting the lowest level since 2000, according to the Mortgage Bankers Association’s seasonally adjusted index,” a CNBC report noted.
“Applications for a mortgage to purchase a home dropped 7% for the week and were 19% lower than the same week in 2021,” the report added. “Buyers have been contending with high prices all year, but with rates almost double what they were in January, they’ve lost considerable purchasing power.”
The CME Group’s CME FedWatch Tool is showing a strong likelihood that rates will rise again at the next Fed meeting, which is what most of the capital markets are expecting. Currently, there’s a 70% expectation that the Fed will raise rates between 225 to 250 basis points.
Given this, the portfolio strategy hasn’t changed for investors given the current market environment. Effectively hedging against rising rates will remain top of mind when it comes to structuring an investor’s portfolio.
An ETF With a Built-In Hedging Component
There are various ways investors can hedge effectively against interest rates, but there’s an easier way than holding several positions and/or combining various strategies. One exchange traded fund (ETF) essentially does it all by having a built-in hedging component: the Global X Interest Rate Volatility & Inflation Hedge ETF (IRVH).
IRVH seeks to hedge relative interest rate movements arising from a steepening of the U.S. interest rate curve and to benefit from periods of market stress when interest rate volatility increases, while also providing inflation-protected income. It combines over-the-counter options on the interest rate markets with U.S. Treasury inflation-protected securities (TIPS) to hedge inflation and interest rate risk.
Highlights of IRVH:
- Efficient hedge: By pairing TIPS with over-the-counter (OTC) interest rate options, IRVH offers investors the ability to potentially hedge against inflation and benefit from falling short-term interest rates and/or rising long-term interest rates.
- Portfolio diversifier: IRVH is expected to exhibit low correlation with equity, real estate, and fixed income markets, making it a potential diversifier within a broader portfolio.
- Monthly distributions: IRVH expects to make monthly distributions with the potential for inflation-protected income.
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