FolioBeyond ETF Makes the Most of Spiking Mortgage Rates

FolioBeyond ETF Makes the Most of Spiking Mortgage Rates

Despite its short, choppy history, interest-only portfolio delivers.

Jeff_Benjamin
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Wealth Management Editor
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Reviewed by: Lisa Barr
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Edited by: Lisa Barr

With mortgage rates now hovering at a 20-year high, the table appears to be set for another strong run by the FolioBeyond Alternative Income & Interest Rate Hedge ETF (RISR)

Launched in October 2021 to ride the most recent rising-rate cycle, RISR has been on a bit of a roller coaster that included a name change and some big outflows when it looked like the Federal Reserve might be moving toward a more neutral monetary policy. 

The exchange-traded fund, which invests in the interest-only sleeve of mortgage-backed securities, was originally named the FolioBeyond Rising Rates ETF, for obvious reasons.  

Dean Smith, FolioBeyond’s chief strategist and portfolio manager, said the name was changed in June because the original name “made it seem like the strategy would only be useful if someone thought rates would continue to rise.” 

“We view this as a core holding for anyone managing fixed income,” he added. 

Keeping RISR as a core portfolio holding might require some confidence that the Fed is truly on track toward higher interest rates for longer, as some analysts have been forecasting. 

The fund, which saw its assets under management peak to $160 million last summer, is now at $57 million despite performance that is respectably ahead of its two benchmarks, the Bloomberg Bond Market Aggregate and the inverse seven-year U.S. Treasury bond. 

Year to date, RISR is up 10.7% and is up 22.3% over the past 12 months. 

By comparison, the iShares Core U.S. Aggregate Bond ETF (AGG) is up 0.14% this year and down 4.2% over the trailing 12 months. 

Representing the inverse seven-year Treasury bond, the ProShares Short 7-10 Year Treasury ETF (TBX) is up 5.4% this year and 14% over the past 12 months. 

Measured over the period since the fund’s September 2021 launch, RISR is up 46.4%, AGG is down 12.9% and TBX is up 23.8%. 

If there’s anything standing in the way of RISR’s appeal among financial advisors, it might be the relatively short track record and the slightly nuanced strategy that could be confused for ETFs investing in the broader mortgage-backed securities industry. 

“MBS ETFs are more of a play on higher rates, but the underlying mortgages are typically for some kind of commercial structure,” said Eric Beiley, executive managing director at Steward Partners. 

Spiking Mortgage Rates 

He called it a “little bit of a Catch-22, to invest in mortgage rates when you can get 5% in money markets with no risk.” 

“I like fixed income and I see value in fixed income, but I’m looking at other parts of the fixed income market,” Beiley added. 

The broader MBS market has been struggling, as illustrated by the $16 billion Vanguard Mortgage-Backed Securities ETF (VMBS), down 0.18% this year, and the $26.3 billion iShare MBS ETF (MBB), down 0.51% this year. 

But the key ingredient of RISR is the interest-only component, which benefits from rising rates because borrowers are less likely to refinance at a higher rate. 

The current average for a new 30-year mortgage is 7.67%, with the average refinance rate at 7.96%. 

“The refinance incentive goes away when rates are higher, so people stay in their mortgage longer and we’re receiving that interest-only cash flow for longer,” said Smith. “The long-term thesis of rising rates and staying higher for longer is the next thematic focus for investors. We’re not going back to zero anytime soon.” 

 

Contact Jeff Benjamin at @[email protected]  

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.


Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.


Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.