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This Rate Hedge ETF Is Up 60% This Year As Stocks, Bonds Sink Into Market Mayhem – MarketWatch | Gmx Pharm

Hi! This week’s ETF Wrap looks at a rate-hedging ETF that is posting massive gains amid the carnage of 2022, along with other funds investors might consider amid concerns about elevated inflation and “roller coaster” markets.

Please send feedback and tips to christine.idzelis@marketwatch.com. You can also follow me on Twitter at @cidzelis and find me on LinkedIn.

Inflation has fueled fears in the struggling US stock market this week as investors fear the persistently high cost of living in the US will prompt more aggressive rate hikes by the Federal Reserve. But in the carnage, a small exchange-traded fund looking to hedge against rising long-term interest rates has emerged as the big winner with massive gains of around 60%.

The Simplify Interest Rate Hedge ETF PFIX,
who is worth around $325 million is up 60.4% this year through Wednesday, according to FactSet data. The S&P 500 SPX
fell by 17.2% over the same period.

“PFIX is an insurance policy” that can be used to hedge against exposure to long-dated bonds in a portfolio, Harley Bassman, managing partner at Simplify Asset Management, said in a phone interview. “It’s not that I hope bonds crash, but I buy them to protect myself.”

As interest rates have risen this year, bonds have suffered steep losses. The iShares Core US Aggregate Bond ETF AGG
is down 16.4% on a total return basis in 2022 through Wednesday, while the iShares 20+ Year Treasury Bond ETF TLT
was down 26.1% over the same period, according to FactSet data.

“If you want to use it as interest rate speculation, that’s fine,” Bassman said of PFIX. “But it’s actually designed as an insurance product.”

Bassman suggested that PFIX, which benefits from rising interest rates, could account for 5% of a portfolio’s long-term interest rate risk, such as B. 20-year government bonds. If rates fall sharply as the US enters a recession, PFIX will fall while the 95 percent exposure to bonds should rise, he said.

The Simplify Interest Rate Hedge ETF “is an options product where you have limited losses and unlimited gains,” according to Bassman. “It behaves like a 7-year put on a 30-year Treasury note,” he said.

‘bloodbath’

The Fed has raised interest rates aggressively this year to tame rising inflation.

Having lost credibility with his initial expectations that the rise in the cost of living would be temporary, Bassman says Fed Chair Jerome Powell is now likely driven to fight inflation through tighter monetary policy to the point where an economic contraction is triggered.

“I don’t see Powell stopping this rate hike until inflation slows down really badly because he doesn’t want to be blamed for inflation,” he said. Bassman expects the Fed to keep raising rates and “pushing us into recession” to reduce demand in the economy and bring inflation under control.

Earlier this week, CPI showed US inflation was hotter-than-expected in August, even as energy prices fell, prompting a sell-off in equities.

Read: Cathie Wood: Fed ‘probably overdoing it’ on inflation fight, warns of signs of deflation

Based on CPI data, the cost of living rose 0.1% in August, an annual rate of 8.3%.

“I don’t see inflation going down to 3% or 4% anytime soon,” Bassman said. He said he expects the Fed to raise interest rates to at least 4% from their current target range of 2.25%-2.5%.

Inflation isn’t likely to come down anytime soon because the owner-equivalent rent, or the lodging component of the CPI, lags home prices by six months, according to Bassman. Also, labor shortages are providing a “tailwind” for wages as baby boomers exit the workforce in recent years and the number of immigrants to the US has declined, he said.

HARLEY BASSMAN COMMENTARY NOTE DATED SEPT. 7th, 2022

The CPI report, released Sept. 13, caused “a bloodbath” in the market, said Greg Bassuk, chief executive officer of AXS Investments, in a phone interview.

“I think the scary part for a lot of people was the extent to which prices surged beyond core inputs,” Bassuk said. Many investors had expected lower gasoline prices to lower inflation in August, he said.

Amid fears that the cost of living will remain high, Bassuk suggested investors might consider the AXS Astoria Inflation Sensitive ETF PPI,
which provides exposure to areas such as commodities, government inflation linked bonds known as TIPS and cyclical stocks including financials, energy, industrials and materials. These areas tend to do well in inflationary environments, he said, and “an investor can diversify their portfolio very much” with a single ETF.

In his view, the 2022 rollercoaster will continue this year with questions about Fed policy, geopolitical risks and the upcoming US midterm elections. For this reason, investors may also want to consider “liquid alternative” investment strategies, which “have the downside,” he said.

For example, the AXS Chesapeake Strategy Fund Class I EQCHX
is up 21.4% this year through Wednesday, FactSet data shows. The managed futures ETF is based on a “trend-following” strategy and has exposure to areas uncorrelated to the S&P 500, according to Bassuk.

“The strategy isn’t necessarily designed to keep up with strong stock markets,” he said, “but it does allow investors to diversify their portfolios so they can weather the market storm we’re witnessing this year.”

As usual, here’s your look at the best and worst ETFs over the past week through Wednesday, according to FactSet data.

The good…
top performer

%Perfomance

United States Natural Gas Fund LP UNG

14.2

United States Oil Fund LP USO

6.8

First Trust Natural Gas ETF FCG

6.7

iShares US Oil & Gas Exploration & Production ETF IEO

6.3

iShares Silver Trust SLV

5.7

Source: FactSet data through Wednesday, September 14, excluding ETNs and leveraged products. Includes ETFs traded on the NYSE, Nasdaq and Cboe worth USD 500 million or more.

…and evil
Lower performers

%Perfomance

AdvisorShares Pure US Cannabis ETF MSOS

-7.2

First Trust Materials AlphaDEX Fund FXZ

-5.2

iShares US Home Construction ETF ITB

-4.9

SPDR S&P Homebuilders ETF XHB

-4.4

Real Estate Select Sector SPDR Fund XLRE

-3.3

Source: FactSet data

New ETFs
  • AllianceBernstein announced on September 14 that it has launched its first line of active exchange-traded funds, the AB Ultra Short Income ETF YEAR
    and the AB Tax-Aware Short Duration Municipal ETF TAFI.

  • Krane Funds Advisors announced on Thursday that it has launched the KraneShares S&P Pan Asia Dividend Aristocrats ETF KDIV
    to “give exposure to companies in China, Japan, Australia and other Asian countries that have paid and increased their dividends for an extended period of time.”

Weekly ETF reads

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