SIT is a USD14 billion asset management firm that has been managing money for 36 years. A product that the firm originally developed for the institutional market has now been incorporated within an ETF, enabling bond investors to protect their portfolios in a rising interest rate environment.
Senior portfolio manager at the firm, and responsible for overseeing USD7 billion in investment, Bryce Doty (pictured), explains that the SIT Rising Rate ETF or RISE is a strategic interest rate-hedging tool that gives investors the opportunity to benefit from the rise in the interest rates of US Treasury notes.
The portfolio targets a negative 10-year duration using futures and options on two, five and 10-year maturity Treasury futures contracts. It can be used strategically as a hedge, allowing investors to keep their bond positions but providing protection when rates rise.
Doty says: “It’s a nice way for investors to hedge their bond portfolios when they don’t want to have to deal with going into the futures and options markets. RISE protects against an increase in short to intermediate Treasury yields.”
The proof of the pudding is in the eating and the short term rate rise announced by the Federal Bank during the week saw most two and five year bonds lose money while RISE makes money when the yields go up. SIT offers an Interest Rate Defense Calculator on its website, which enables investors to calculate the impact of rising rates on various bond holdings, and to determine the benefit of hedging.
Doty says: “If you are worried about the Fed then hedge the right part of the yield curve – RISE can be the shock absorber to an existing bond portfolio.” The ETF packaging of the technique allows for liquidity and access to any type of investor. Doty says: “The problem with investing in bonds is that advisers have told their clients that bonds are the safe part of their portfolios but when rates go up you lose money in bonds and it’s really difficult to explain why a client lost money in their bonds.
“We have clients that might lose 5 or 10 per cent in their stock portfolios and not flinch but if they lose 1 per cent in their bond portfolios, it’s a problem.
“With rates rising you are seeing losses and it becomes awkward for an adviser because everyone who is not living under a rock knows that rates are going up and with products like RISE available it’s difficult to explain why you didn’t do something to protect your investments.”
Doty says that the Fed announcement to reduce their balance sheet was important because it means that they have decided to stop throwing good money after bad. The Fed has been buying bonds knowing they will drop in value as they continue to raise rates.
“Similarly as a bond investor if you don’t do anything to hedge, you are basically no better than the Fed constantly re-investing. An adviser needs to go to clients and say here is a tool we can use to protect your bond portfolio.”
