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Play Rising Rate Concerns with the New ETF RISE - ETF News And Commentary

Zacks Equity Research

The surge of ETF issuances of late to hedge rising interest rate concerns follows a relatively determined Fed’s intention to end its prolonged low interest rate policy this year. While a slack in inflation and global growth worries still have restrained the Fed from taking the step so long, it is evident that sooner-or-later, the world will see the U.S. rates rise. Obviously, this has made investors cautious about their bond holdings.


Thus, as a guard to this situation, various issuers are rolling out interest rate-hedged products. Like several other players, ETF Managers Capital LLC, a subsidiary of ETF Managers Group, joined hands with Sit Investment Associates to roll out the first exchange traded fund on the said issue via negative bond duration.


This negative interest rate strategy appears beneficial for investors given the ongoing rising rate concerns that are troubling a host of securities and could put pressure on the traditional income producing products as well.


The newly launched fund which trades in the name of Sit Rising Rate ETF (RISE) was launched on February 19. Let’s delve a little deeper (read: 5 Ways to Play Rising Rates with Hedged & Inverse ETFs).


RISE in Focus



The ETF looks to track the performance of a portfolio comprising exchange traded futures contracts and options on futures on 2, 5 and 10-year U.S. Treasury securities weighted to attain the targeted negative 10-year average effective portfolio duration. Though this method, the ETF would see a 10% price appreciation with a 1% rise in U.S. Treasury yields.


This exposure is however a bit pricey, as the fund looks to charge investors 50 basis points a year in fees through February 1, 2016.


How Could it Fit in a Portfolio?


With the U.S. economic indicators rebounding from Q2 of 2014 and likely to maintain its wining growth momentum this year too, rock-bottom interest rates in the U.S. could undergo hikes, sooner or later this year. Investors should note that the Fed withdrew its QE support in October 2014.


At a time like this when investors are extremely cautious about rising rate risks and stock market volatility, investments in inverse interest ETFs to cash in on potential rising rates could be good bets. And to accomplish this investing goal, RISE comes across as a best-suited product (read: 3 ETFs for Rising Interest Rates).


Products targeting negative effective duration produce decent returns in the face of rising rates. RISE with as much as negative 10-year average effective portfolio should deliver an outsized return when the rates rise (read: Rising Interest Rates Are Great News for These Bond ETFs).


Competition


We expect the newly launched fund to draw investors’ interest as it has entered a still under-tapped investing arena. Currently, there are two such funds both issued by WisdomTree. These are the Aggregate Bond Negative Duration Fund (AGND) which has negative 5-year duration, and then the High Yield Bond Negative Duration Fund (HYND) which has a negative 7-year duration for those who focus on the junk bond market.


However, the newly launched RISE should generate its own following as the product targets a steeper negative duration of 10 years, unlike its two competitors. However, this efficient exposure is quite pricey as its peers charge 28 bps and 48 bps in fee respectively while RISE looks to charge as high as 150 bps. This factor can come in the way of the fund’s objective of smooth asset generation.


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WISDMTR-B USABN (AGND): ETF Research Reports
 
WISDMTR-MLHYBN (HYND): ETF Research Reports
 
SIT-RISING RATE (RISE): ETF Research Reports
 
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