AI-powered asset manager FolioBeyond has debuted its first ETF, an actively managed fixed income strategy that seeks to generate a high level of current income while also offering an effective hedge against rising interest rates.
Yung Lim, CEO of FolioBeyond.
The FolioBeyond Rising Rates ETF (RISR US) has been listed on NYSE Arca through private-label ETF platform Tidal ETF Services.
The fund invests primarily in a combination of US Treasuries and interest-only mortgage-backed securities (MBS IOs).
MBS IOs derive their cash flows solely from the interest payments on a pool of underlying mortgages. The value of an MBS IO reflects the present value of expected interest cash flows while accounting for prepayment risk.
MBS IOs tend to exhibit negative duration due to the effect that changes in interest rates have on prepayment behaviour. For example, a decline in interest rates increases prepayments of principal as borrowers refinance their mortgages. Since these prepayments terminate the stream of interest payments made on the mortgage pool, they lower the value of MBS IOs. Similarly, as interest rates increase, prepayments decrease, and the value of MBS IOs increase.
The ETF invests exclusively in agency-backed MBS IOs, targeting an effective portfolio duration of minus ten years, meaning that a 1% parallel upwards shift in the yield curve would result in a 10% performance gain. The fund will also invest in US Treasuries as needed to balance duration towards the target.
The ETF may appeal to income investors who wish to express a directional view to profit from rising rates as well as investors seeking to shorten portfolio duration without selling existing positions. The fund may also serve as a diversifier for fixed income portfolios regardless of one’s views on rates.
Yung Lim, CEO of FolioBeyond, said: “The global pandemic has extended a long-term macro environment where interest rates are extremely low and appear asymmetrically skewed toward higher rates in the future. Most rising rate protection strategies are expensive and exhibit negative carry. RISR employs a positive carry strategy that looks to benefit from secularly higher interest rates and could attract significant interest from a broad range of institutions and retail investors.”
The ETF comes with an expense ratio of 1.01%.