Mortgage-Interest ETF Tops Bond Category
FolioBeyond RISR is riding the mortgage market even as rates pull back.
The downward trajectory of interest rates has yet to ding the performance of the FolioBeyond Alternative Income & Interest Rate Hedge ETF (RISR).
With two interest rate cuts under its belt, the Federal Reserve is gradually pushing rates lower, not higher. But RISR, the lone ETF from New York-based FolioBeyond, stands out as the best-performing non-leveraged fixed income ETF this year.
Up nearly 18%, the actively managed portfolio of interest-only mortgage-backed securities is beating the second-best performer this year by nearly four percentage points.
Key to the outperformance is the correlation to the longer end of the yield curve, according to FolioBeyond Chief Executive Yung Lim, who said RISR is still a ways from being impacted by falling interest rates.
“The reason it behaves differently when the short end of the yield curve moves is because the short end has nothing to do with mortgage rates,” he said.
Mortgage-Interest ETF RISR Tops Bond ETFs
Launched in September 2021 when the Fed was starting to aggressively raise rates to a 20-year high to try and tamp down the inflation that resulted from the record government stimulus spending during the Covid pandemic, RISR was the first ETF to give investors such concentrated exposure to the $150 billion MBS market.
At less than $50 million, RISR has been slow to gain traction among investors and financial advisors, despite strong performance that includes about five percentage points of income inside the total return.
Lim believes part of the slow start might have been tied to the ETF’s original name identifying the strategy as a rising rate strategy.
“We changed the name because we found that people thought it was a short-term macro play,” he said.
Having crested the three-year mark last month, RISR has been awarded a five-star rating by Morningstar, which ranks it first among 272 mutual funds and ETFs in the non-traditional bond category.
In terms of the outlook for performance heading into a cycle of gradually falling interest rates, Lim said RISR is positioned with securities exposed to mortgages of between 2.5% and 5%. Considering that mortgage refinance rates are still hovering close to 7%, Lim said the portfolio is still positioned for upside performance.
