Simplify’s New Interest-Rate ETF Takes on TLT

After more than three years of offering investors a way to benefit from rising interest rates through the Simplify Interest Rate Hedge ETF (PFIX), the New York-based ETF issuer is hedging its bet with a strategy designed around falling long-term interest rates.

The Simplify Downside Interest Rate Hedge Strategy ETF (RFIX) is being promoted as the flipside of PFIX by hedging interest rate movements arising from falling long-term rates.

PFIX, which is up nearly 24% this year, has earned a 5-star rating from Morningstar out of 160 funds in the Inflation-Protected Bond fund category.

RFIX, like PFIX, was created and is being managed by Harley Bassman, managing partner at Simplify Asset Management, which manages $5.7 billion across 30 exchange-traded funds.

The RFIX strategy, which charges 50 basis points, is centered on a seven-year, over-the-counter receiver swaption, which functions similarly to a long-term call option on U.S. Treasury bonds by essentially hedging out the risk of declining yields of long-term government bonds.

Simplify Boasts a Better Ratio Than TLT

Bassman described RFIX as having more upside than the wildly popular iShares 20+ Year Treasury Bond ETF (TLT).

“RFIX will move more than TLT for a given rate change and with more convexity,” he said, referencing the upside-downside ratio that favors RFIX because it uses options, while TLT just owns Treasury bonds.

“The capital-efficient structure of RFIX enables investors to achieve their desired duration exposure with a smaller capital outlay compared to traditional bond funds,” Bassman said. “This frees up capital for use in other strategies and asset categories, resulting in more diverse and robust portfolios.”

While Bassman has already proven his ability to pull off the strategy through the success of PFIX, the challenge facing RFIX is the direction of long-term rates, which are not moving in stride with the short-term rates being cut by the Federal Reserve’s current monetary policy trend.

The 10-year Treasury bond is currently yielding about 4.4%, which is up from 1.59% when PFIX was launched in May 2021.

But for RFIX to enjoy the same kind of success, those long-term yields will need to start dropping.

“Some people think the economy is already in recession and that we’re heading toward a hard landing that will drive Treasury’s higher and yields lower; just ask the 30 billion people who own TLT,” Bassman said, exaggerating to illustrate the popularity of TLT. “I don’t think we’re heading toward a hard landing, but that’s not my problem.