New York-based Advocate Capital Management , a provider of portfolio risk management solutions, has introduced its debut ETF: the Advocate Rising Rate Hedge ETF (RRH US) . The ETF employs multiple strategies across asset classes in order to provide a diversified hedge against rising interest rates.
Listed on NYSE Arca, the actively managed fund aims to offer an effective hedge against rising long-term interest rates – specifically interest rates with maturities of five years or longer – by employing multiple strategies across asset classes including fixed income, equities, and currency pairs.
The fund aims to distinguish itself from other rising-rate products that mainly short bonds or purchase options. According to Advocate, these products tend to have significant negative carry resulting in poor performance over longer periods.
The fund’s fixed income sleeve consists of a yield curve strategy, enacted through derivatives linked to interest rates or the swap yield curve, that seeks to profit when longer-maturity yields rise faster than shorter-maturity yields.
The strategy generally entails taking short positions in longer-duration US Treasuries, which are expected to decrease in value due to concerns over inflation and rising rates, and taking long positions in shorter-duration Treasuries that are expected to be less sensitive to rising rate concerns.
The fund’s equities sleeve consists of investing in sector ETFs that are likely to outperform in a rising rate environment (such as financials) while shorting futures linked to sector ETFs that are likely to underperform.
The financials sector has, historically, been a significant outperformer during periods of rising interest rates. Expanding profit margins, fewer borrower defaults, and greater investment activity help banks, insurance companies, and brokerages to perform well. Other sectors that may receive a boost include consumer discretionary and industrials as a strengthening economy drives consumer spending, home building, and general industrial activity higher.
The fund’s currencies sleeve consists of taking a long position in the US dollar and short positions in currencies of countries that are behind the US in the business cycle. The strategy aims to take advantage of widening interest rate differentials between the US and other countries which are expected to cause the US dollar to appreciate relative to these countries’ currencies.
The fund comes with an expense ratio of 0.85%.
Advocate Capital Management is based in New York and has more than $6 billion of advisory assets under management. It was founded by Scott Peng, who acts as the firm’s CEO and CIO. Peng has previously held senior positions at Credit Suisse, BlackRock, and Citigroup.
RRH is the second specialist ‘rising rates’ ETF in as many months. In October, AI-powered asset manager FolioBeyond launched the FolioBeyond Rising Rates ETF (RISR US), an actively managed strategy that aims to generate a high level of current income while also providing an effective hedge against rising interest rates. It invests in a combination of US Treasuries and interest-only mortgage-backed securities. RISR comes with an expense ratio of 1.01%.