What You Need To Know About Rising Rate ETFs

In addition, the Sit Rising Interest Rate ETF (RISE) is a relatively new entrant in this field with a subtly different method of owning a portfolio of futures and options contracts that targets a negative 10-year Treasury duration. One of the biggest differences with RISE is that the portfolio is re-balanced monthly rather than daily, which will impact its tracking behavior over time.

How To Use Rising Rate ETFs

Rising rate ETFs are another tool that can be added to the arsenal, but they aren’t going to be a cure-all for every aspect of your bond portfolio. They are designed to be used as short-term trading vehicles that sophisticated investors can implement in order to bet on a specific outcome (i.e. falling bond prices). In addition, these funds may be appropriate for those that wish to hedge off a portion of their bond portfolio without having to disturb existing positions.

The key to any hedge is having an appropriate position size without taking too much risk. With that goal in mind, the brain trust behind the new RISE ETF have created an “Interest Rate Defense Calculator” that may help you analyze the impact of their fund on your existing bond portfolio. You simply input your bond portfolio yield, duration, and anticipated exposure to RISE in order to determine how the overall sensitivity to interest rates will change.

I highly recommend that anyone considering making a purchase of a rising rate ETF as a hedge go through this exercise. It will provide a fresh perspective and objective data point that may play a role in determining your final allocation size.

Putting Things In Perspective

The biggest misconception about the Fed raising interest rates is that bond prices have to go down. That simply isn’t the case. The Fed doesn’t set the price of the Vanguard Total Bond Market ETF (BND), the market does based on buyers and sellers meeting at an agreeable junction.

There are innumerable scenarios that could play out that would negate a rising interest rate environment or create a choppy trend. That would ultimately make a rising rate ETF expensive and frustrating to own when analyzed against other comparable opportunities. Remember that timing is a key aspect of hedging or betting against the natural flow of a market cycle as well.  If your timing is off, you are going to feel the pain of being in the wrong spot at the wrong time.

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FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this post. ...

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