It is well-known that investing into fixed income instruments has been a losers’ game ever since the Federal Reserve began raising interest rates.
2022 was the worst-ever year on record for U.S. bond investors, according to an analysis by Edward McQuarrie, a professor emeritus at Santa Clara University who studies historical investment returns.
And the Bloomberg Global Aggregate Bond Index, which tracks investment grade debt, like Treasuries, and is the benchmark for many of the world’s largest passive bond funds, plunged 16.3% in 2022, its worst on record.
Yet, there is a small fixed-income exchange-traded fund (ETF) that has gained a remarkable 200% since the end of 2021. Let’s take a look at it.
Simplify Interest Rate Hedge ETF
The fund is the Simplify Interest Rate Hedge ETF (PFIX), which is also up another 40% over the past year. It seeks to hedge interest rate movements arising from rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for income.
So how has this fund turned in such an outstanding performance during this brutal bear market in bonds?
Bloomberg’s Ye Xie wrote about how the fund is the brainchild of Harley Bassman. While at Merrill Lynch in 1994, Bassman created the MOVE Index, which is a market-implied measure of bond market volatility. It is Wall Street’s most widely watched benchmark for U.S. Treasury market volatility.
Bassman told Xie that he first came up with the idea for the ETF in late 2020, a few years after retiring from Pacific Investment Management, where he worked with Paul Kim—who started Simplify in 2020—for three years. At that time, the Fed’s zero-rate policy and seemingly unending bond purchases to fight the pandemic were keeping both yields and bond market volatility near record lows.
Bassman, now the managing partner at Simplify Asset Management, realized the Fed’s metaphorical gravy train for bond investors couldn’t last forever. So, in May 2021, he launched the Simplify Interest Rate Hedge ETF. It’s not a fund to bet on the direction of the bond market, but a fund designed for investors to hedge against interest-rate risk and volatility.
Currently, it owns long-dated options—known as payer swaptions—on 20-year interest-rate swaps. This is equivalent to buying put options on 30-year Treasuries. It’s a trade that can pay off handsomely if yields rise along with volatility.
And it has certainly paid off for Bassman in a spectacular fashion. The 30-year Treasury yield surged above 5% this month for the first since 2007. At the end of 2020, it stood at a mere 1.6%. The quick rise in yields sent…
Continue reading at INVESTORSALLEY.com