Interest Rate Hedge ETFs on the Rise Again
Interest rate hedge ETFs are once again rising, especially after the Fed’s 11th rate hike. The central bank, in its latest meeting, raised interest rates by a quarter-percentage point and signaled the possibility of further increases ahead (read: ETFs to Gain as Fed Raises Rates to a 22-Year High).
The rate hike brings the benchmark interest rate, the federal funds rate, to 5.25-5.50%, the highest level since March 2001. “Recent indicators suggest that economic activity has been expanding at a moderate pace," the Fed said in its statement. "Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated." Although inflation has dropped from the peak of 9.1%, it has a long way to go to meet the Federal Reserve's 2% target.
The American economy surprisingly picked up steam in the second quarter, thanks to resilience among consumers and businesses in the face of high interest rates. This is especially true as the GDP grew 2.4% annually from 2% growth in the first quarter.
Additionally, the surge in yields contributed to the rally in these ETFs. Treasury yields spiked to the highs of 2023 in the Aug 2 trading session, buoyed by plans of government debt issuance and signs of the labor market’s enduring strength. The 10-year yields topped 4.12%, marking the highest level since November 2022, while 30-year yields reached their highest level in nearly nine months to about 4.2% (read: Inverse Treasury ETFs Spike as Yields Hit 2023 Highs).
Higher Rates: Pros and Cons
The increase in interest rates has made borrowing expensive, pushed up the cost of buying a new car or house, increased the cost of carrying credit card debt and thus slowed down the economic growth. This will further boost the U.S. dollar against the basket of other currencies, thereby leaving a huge impact on commodity-linked investments. Thus, a rising-rate environment will hurt a number of segments.
In particular, high dividend-paying sectors such as utilities and real estate would be the worst hit, given their higher sensitivity to rising interest rates. Additionally, securities in capital-intensive sectors like telecom would also be impacted by higher rates. However, higher interest rates usually indicate a healthy economy, leading to greater consumer power and increased IT spending. This combination of factors will result in increased industrial activity and a pickup in consumer demand.
This has compelled investors to flock to the interest rate hedge ETFs to protect themselves from the rising rate environment. We have highlighted a few of them:
Advocate Rising Rate Hedge ETF (RRH)
Advocate Rising Rate Hedge ETF is a multi-asset ETF that seeks to generate capital appreciation during periods of rising long-term interest rates, specifically interest rates, with maturities of five years or longer. It is an actively managed fund and seeks to achieve its investment objective primarily by investing in a combination of U.S. Treasury securities; forwards, futures or options on various currencies; long and short positions on the short and long-end of the Treasury or swap yield curve via futures, swaps, forwards and other over-the-counter derivatives; long and short positions on equity indexes and investment companies, including ETFs; and commodity futures and options.
Advocate Rising Rate Hedge ETF has accumulated $7.1 million in its asset base and charges 85 bps in annual fees. It trades in an average daily volume of 29,000 shares and has gained 8.7% in a month.
Simplify Interest Rate Hedge ETF (PFIX)
Simplify Interest Rate Hedge ETF is the first ETF providing a simple, direct and transparent interest rate hedge. It seeks to provide a hedge against a sharp increase in long-term interest rates and benefit from market stress when fixed-income volatility increases while providing the potential for income.
Simplify Interest Rate Hedge ETF holds a large position in over-the-counter interest rate options intended to provide a direct and transparent convex exposure to large upward moves in interest rates and interest rate volatility. It invests in long-dated put options on 20-year US Treasury bonds to offer the most liquid and the most cost-efficient way of getting interest rate protection. PFIX has accumulated $204.3 million in its asset base and trades in an average daily volume of 117,000 shares. It charges 50 bps in annual fees and has surged 15% in a month.
Global X Interest Rate Hedge ETF (RATE)
Global X Interest Rate Hedge ETF is an actively managed fund that seeks to provide a hedge against sharp increases in long-term U.S. interest rates and is expected to benefit during periods of market stress when interest rate volatility is elevated. It seeks to achieve its investment objective primarily by investing in long interest rate swap options and long positions in short-term U.S. Treasury securities (read: Rates To Remain Higher For Longer? ETFs to Hedge the Trend).
Global X Interest Rate Hedge ETF has amassed $3.3 million in its asset base and trades in average daily volume of 1,000 shares. It charges 47 bps in fees per year and has gained 5.3% in a month.
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Global X Interest Rate Hedge ETF (RATE): ETF Research Reports
Simplify Interest Rate Hedge ETF (PFIX): ETF Research Reports
Advocate Rising Rate Hedge ETF (RRH): ETF Research Reports
