New Tool in Rising Rate, Inflation-Fighting Toolbox

More than a year into the scenarios of rising Treasury yields and inflation that was mistaken for transitory, advisors are understandably wary of hearing about these topics.

Part of the dismay surrounding the ongoing rising rates and inflation conversations is that many of the assets that work when these economic conditions arrive aren’t doing so this year. Owing to rising rates, gold is slumping despite inflation being consistently at its worst levels in four decades. Likewise, although rates are rising, bank stocks are faltering. Bitcoin? Let’s just say it’s failing its first true inflation test.

All of that is a reminder that necessity is often the mother of invention and leave it to the exchange traded funds industry to recognize the necessity while building on its reputation for inventiveness.

As advisors well know, there are plenty of ETFs designed to be plays on rising interest rates and an abundant crop of funds with inflation-fighting credibility. What’s been lacking are ETFs with both objectives in mind. That changed with the recent debut of the Global X Interest Rate Volatility & Inflation Hedge ETF (IRVH).

Investigating IRVH

As its name implies, IRVH is designed to provide a buffer against both rising interest rates and high inflation. In theory, it should be an ideal ETF for the current environment. Time will tell on that front.

“The Global X Interest Rate Volatility & Inflation Hedge ETF (IRVH), seeks to hedge relative interest rate movements arising from a steepening of the U.S. interest rate curve, and to benefit from periods of market stress when interest rate volatility increases, while also providing inflation-protected income,” according to Global X.

While IRVH’s objective is unique in the current ETF landscape, advisors need not worry about pushing exotic fare upon clients. The new ETF simply combines Treasury Inflation-Protected Securities (TIPS) with over-the-counter (OTC) interest rate options. Not surprisingly, TIPS are the best-performing major fixed income segment this year, though that’s not saying a whole lot.

“IRVH  is expected to pay a positive distribution; the curve steepening and flattening is typically a multi-year cycle that reflects the Fed’s easing and tightening cycles, respectively,” adds Global X. “The positive carry along with the option being hopefully an improvement to risk-adjusted returns make this strategy more attractive as a longer term holding in lieu of an allocation to Treasuries or TIPS. The carry is referring to the positive yield that comes from the TIPS, as a portion of the positive yield is used to pay for the cost of the curve option.”

Actively managed, IRVH is positioned as an alternative to traditional fixed income strategies. That’s issuer speak, but given all that’s happening with inflation and rate volatility, IRVH is getting its “show me” moment right out of the gate.

Curve Call

One of the potential advantages of IRVH is that advisors could eventually deploy it within client portfolios as an avenue for combatting steepening yield curves.

“Steepening yield curve would benefit the yield spread curve options and accordingly lower rates would benefit the TIPS portfolio. IRVH may also perform well during periods of uncertainty because it can potentially benefit from both fewer rate hike expectations and increasing inflationary pressures. The payer curve options IRVH implements are on the 2s10s curve and benefit when the forward 2s10s spread widens,” adds Global X.

Bottom line: This isn’t the most exciting new ETF to come along, but it is relevant and it could prove beneficial to clients seeking income and purchasing power protection.

Related: VIG Still Venerable Among Dividend ETFs