In today’s challenging inflationary environment, the FolioBeyond Rising Rates ETF (RISR) employs a distinctive investment methodology. This fund focuses on mortgage-backed securities interest-only strips (MBS IOs) alongside U.S. Treasury bonds—a strategic pairing specifically designed to capitalize on increasing interest rates.
Current economic indicators continue to show persistent inflationary pressures. Market projections indicate U.S. consumer prices will average 2.7% throughout 2025, while core inflation remains stubbornly elevated at approximately 3%. With the Federal Reserve demonstrating caution regarding additional rate reductions, the probability of a December cut now sits below 50%. These conditions have already pushed the yield on 10-year Treasury notes upward to 4.14%.
Understanding Negative Duration
The fund’s distinctive characteristic lies in its utilization of MBS IOs featuring negative duration. Unlike conventional fixed-income instruments, these securities typically appreciate in value as interest rates climb. This counterintuitive behavior stems from the inverse relationship between borrowing costs and mortgage prepayment rates:
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- Higher interest rates discourage homeowners from refinancing, slowing prepayment activity
- Extended payment periods increase the total value of interest-only components
- Declining rates accelerate mortgage repayments, diminishing future income potential
Strategic Positioning for Monetary Tightening
RISR maintains 101 separate holdings, with its ten largest positions representing roughly 30.5% of total net assets. The portfolio’s composition primarily includes:
- Ginnie Mae REMIC Trusts and IO Strips
- Securities issued by Freddie Mac and Fannie Mae
- Shares of the First American Government Obligations Fund
Whether this approach can deliver results amid the Federal Reserve’s cautious policy stance and persistent inflation remains to be seen. Current market dynamics, however, appear to align favorably with the ETF’s underlying strategy.
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