FolioBeyond Launches Active Bond ETF for Rising Rates | ETF Strategy
AI-powered asset manager Folio Beyond launched its first ETF, an actively managed fixed income strategy that seeks to generate a high level of current income while providing an effective hedge against rising interest rates.
The ETF FolioBeyond Rising Rates (RISR US) has been registered on NYSE Arca via the private label ETF platform Tidal ETF Services.
The fund invests primarily in a combination of US Treasuries and Interest Only Mortgage Backed Securities (MBS IO).
MBS IOs derive their cash flows only from interest payments on a pool of underlying mortgages. The value of an MBS OI reflects the present value of expected interest cash flows while taking into account prepayment risk.
MBS OIs tend to display a negative duration due to the effect that changes in interest rates have on prepayment behavior. For example, a fall in interest rates increases prepayments of principal as borrowers refinance their mortgages. Since these prepayments end the flow of interest payments made to the mortgage pool, they reduce the value of the MBS OIs. Likewise, as interest rates increase, prepayments decrease and the value of OI MBS increases.
The ETF invests exclusively in agency-backed MBS IOs, targeting an effective portfolio duration of less than ten years, which means that a parallel upward 1% shift in the yield curve would result in a performance gain of 10%. The fund will also invest in US Treasuries as necessary to balance duration against target.
The ETF may be of interest to income investors who wish to express a directional view to profit from rising rates as well as investors looking to shorten the duration of the portfolio without selling existing positions. The fund can also serve as a diversifier for fixed income portfolios, regardless of what you think about rates.
Yung Lim, CEO of FolioBeyond, said, “The global pandemic has prolonged a long-term macro environment where interest rates are extremely low and appear to be asymmetrically biased towards higher rates in the future. Most upward rate protection strategies are expensive and carry negative carry. RISR employs a positive carry strategy that seeks secularly higher interest rates and could attract significant interest from a wide range of institutions and retail investors. “
The ETF comes with an expense ratio of 1.01%.