This interest rate hedge ETF has soared 60% this year as stocks and bonds plunge into market carnage.

This interest rate hedge ETF has soared 60% this year as stocks and bonds plunge into market carnage.

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Hello! This week’s ETF Wrap takes a look at an interest rate hedge ETF that’s making massive gains amid the carnage of 2022, along with other funds investors might consider amid concerns about elevated inflation and markets of ” roller coaster”.

Send comments and suggestions to christine.idzelis@marketwatch.com. You can also follow me on Twitter at @cidzelis and find me on LinkedIn.

Inflation has stoked fears in the battered US stock market this week, with investors worried that the stubbornly high cost of living in the US will lead to more aggressive interest rate hikes for part of the Federal Reserve. But in the carnage, a small exchange-traded fund looking to hedge against rising long-term rates has remained a big winner with massive gains of around 60%.

The PFIX Simplified Interest Rate Hedge ETF,
with about $325 million in assets, it has soared 60.4% this year through Wednesday, according to data from FactSet. The S&P 500SPX
it fell 17.2% during the same period.

“PFIX is an insurance policy” that can be used to protect against exposure to long-duration bonds in a portfolio, Harley Bassman, managing partner at Simplify Asset Management, said in a phone interview. “Not that I’m expecting the bonds to crash, but I’m buying them to protect myself.”

As rates have risen this year, bonds have suffered heavy losses. The iShares Core US Aggregate Bond ETF AGG
has lost 16.4% in 2022 through Wednesday on a total return basis, while the iShares 20+ Year Treasury Bond ETF TLT
had a 26.1% loss over the same period, according to data from FactSet.

“If you want to use it as speculation on rates, that’s fine,” Bassman said of PFIX. “But it’s actually designed as an insurance product.”

Bassman suggested that PFIX, which benefits in a rising rate environment, could account for 5% of a portfolio’s long-term interest rate exposure, such as 20-year Treasuries. If rates fall too much because the US enters a recession, the PFIX will go down while the 95% exposure to bonds should go up, he said.

The Simplify Interest Rate Hedge ETF “is an option product where you have limited loss, unlimited gain,” Bassman said. “It acts like a 7-year put option on a 30-year Treasury bond.”

‘Slaughter’

The Federal Reserve has been aggressively raising interest rates this year in an effort to rein in rising inflation.

After losing credibility with his initial expectations that the increase in the cost of living was transitory, Fed Chairman Jerome Powell is now probably determined to reduce inflation through tighter monetary policy to the point of triggering an economic contraction, Bassman said.

“I don’t see Powell stopping this rate hike until inflation really slows down because he doesn’t want to be blamed for inflation,” he said. Bassman hopes the Fed will continue to raise rates and “push us into a recession” to reduce demand in the economy and control inflation.

Earlier this week, the consumer price index showed that US inflation in August was higher than expected, even as energy prices fell, triggering a sell-off in stocks.

Read: Cathie Wood: Fed ‘probably overdoing it’ in battle against inflation, warns of signs of deflation

Based on CPI data, the cost of living rose 0.1% in August for an annual rate of 8.3%.

“I don’t see inflation going down to 3% or 4% any time soon,” Bassman said. He said that he expects the Fed to raise its benchmark rate to at least 4%, from its current target range of 2.25% to 2.5%.

Inflation is not likely to come down quickly in the short term, as homeowners’ equivalent rent, or the housing component of the consumer price index, tends to lag home prices by six months, according to Bassman. He also noted that labor shortages are providing a “tailwind” for wages as a result of baby boomers leaving the labor force and the decline in immigrants arriving in the US in recent years. years.

Source: Harley Bassman comment note dated September 7, 2022

The CPI report, released on September 13, caused a “bloodbath” in the market, Greg Bassuk, chief executive of AXS Investments, said in a telephone interview.

“I think the scary part for a lot of people was the extent to which there was a rise in prices beyond basic inputs,” Bassuk said. Many investors had expected lower gasoline prices to reduce inflation in August, he said.

Amid concerns that the cost of living will remain high, Bassuk suggested investors might consider the AXS Astoria PPI ETF inflation-sensitive.,
which provides exposure to areas such as commodities, Treasury inflation-protected securities known as TIPS and cyclical stocks, including financials, energy, industrials and materials. Those areas tend to do well in inflationary environments, he said, plus “an investor can diversify their portfolio very significantly” with a single ETF.

In his view, the “roller coaster of 2022” will continue this year with questions about Fed policy, geopolitical risks, and the upcoming US midterm elections. For that reason, investors might also want to consider investment strategies “liquid alternatives” that inconvenient”, he said.

For example, the AXS Chesapeake Strategy Fund Class I EQCHX
it is up 21.4% this year through Wednesday, FactSet data shows. The managed futures ETF is based on a “trend following” strategy and is exposed to areas that do not correlate with the S&P 500, according to Bassuk.

“The strategy is not necessarily designed to keep pace with strong stock markets,” he said, “but it allows investors to diversify their portfolios so they can weather the storm in markets like the ones we’re seeing this year.”

As usual, here’s your look at the top and bottom performing ETFs in the last week through Wednesday, according to data from FactSet.

The good…
Better performance

%Performance

United States Natural Gas Fund LP UNG

14.2

Petroleum Fund of the United States LP USO

6.8

First Trust Natural Gas ETF FCG

6.7

iShares US Oil & Gas Exploration & Production ETF IEO

6.3

iShares Silver Trust SLV

5.7

Source: FactSet data as of Wednesday, September 14, excluding ETNs and leveraged products. Includes ETFs listed on NYSE, Nasdaq and Cboe of $500 million or more.

…and the bad
Inferior performers

%Performance

AdvisorShares Pure US Cannabis ETF MSOS

-7.2

First Trust Materials AlphaDEX FXZ Fund

-5.2

iShares ITB US Homebuilding ETF

-4.9

SPDR S&P Home Builders ETF XHB

-4.4

Select Real Estate SPDR Fund XLRE

-3.3

Source: FactSet data

New ETFs
  • AllianceBernstein announced on September 14 that it launched its first set of active exchange-traded funds, the AB Ultra Short Income YEAR ETF.
    and the AB Tax-Aware Short Duration Municipal ETF TAFI.

  • Krane Funds Advisors said Thursday that it has launched KraneShares S&P Pan Asia Dividend Aristocrats ETF KDIV
    to provide “exposure to companies in China, Japan, Australia and other Asian countries that have paid and increased their dividends over a sustained period.”

Weekly ETF Readings



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