RISR: A High-Yield, Negative Duration ETF for Hedging in a Rising Rate World

In an era of persistent inflation and aggressive Federal Reserve tightening, investors are increasingly seeking tools to protect their portfolios from the dual threats of rising interest rates and market volatility. Enter the FolioBeyond Alternative Income and Interest Rate Hedge ETF (RISR), a unique, actively managed exchange-traded fund designed to generate income while mitigating interest rate risk. With a 6.42% 30-day SEC yield and a structure built for rising rate environments, RISR offers a compelling solution for income-focused investors navigating today's uncertain landscape.

Strategic Structure: Negative Duration and Active Management

RISR's core strategy revolves around interest-only mortgage-backed securities (MBS IOs) and U.S. Treasury bonds. MBS IOs, which receive only the interest portion of mortgage payments, possess negative duration—a rare characteristic that causes their value to rise as interest rates increase. This inverse relationship is a critical advantage in a tightening cycle, where traditional fixed-income assets often underperform.

Complementing this are U.S. Treasury bonds, which provide a stabilizing counterbalance. By dynamically adjusting the fund's allocation between MBS IOs and Treasuries, RISR's active management team tailors the portfolio's duration to capitalize on rate movements. This “quantamental” approach—combining quantitative models with fundamental insights—enables RISR to adapt swiftly to shifting market conditions, a rarity in passive strategies.

The fund's expense ratio of 0.99% (including 0.14% in acquired fund fees) is competitive for an actively managed ETF, especially given its specialized focus. With a gross asset base of $169.5 million and 95 holdings, RISR balances concentration in high-conviction assets with diversification across sectors and maturities.

Proven Performance in Volatile Rate Environments

RISR's track record in rising rate scenarios is nothing short of impressive. During the 2022 rate-hiking cycle, the fund delivered a 15.39% net asset value (NAV) return in just one year, far outpacing the ETF Database Category average of 0.69% and the FactSet Segment average of 7.70%. This outperformance was driven by its exposure to MBS IOs, which thrive when rates climb.

Even in 2025, as the Fed continues to navigate inflationary pressures, RISR has maintained its edge. From September 2024 to mid-January 2025, the fund demonstrated positive convexity, rising more sharply in a rate-up environment than it fell during brief rate declines. This asymmetric payoff profile is a hallmark of well-structured negative duration strategies.

High-Yield Potential with Income Stability

For income-oriented investors, RISR's 6.42% 30-day SEC yield is a standout feature. This yield, derived from monthly distributions of interest income and dividends, is bolstered by the fund's focus on high-coupon MBS IOs and Treasury securities. While there are no guarantees of future distributions, the fund's active management allows it to adjust exposures to maintain income stability even in volatile markets.

Critically, RISR's yield is not a one-time windfall. Its structure ensures a consistent pipeline of income, making it a viable alternative to traditional high-yield bonds or dividend stocks in a rising rate world.

Strategic Role in Diversified Portfolios

RISR's value extends beyond its yield and duration profile. Its low correlation to traditional asset classes—such as equities and long-duration bonds—makes it an effective diversifier. In a portfolio context, RISR can:
1. Hedge against rate risk: Its negative duration offsets losses in rate-sensitive assets like corporate bonds.
2. Generate uncorrelated income: Monthly distributions provide a steady cash flow, even as broader markets fluctuate.
3. Enhance risk-adjusted returns: By reducing portfolio volatility during rate hikes, RISR improves overall risk-return dynamics.

Risks and Considerations

No investment is without risk. RISR's active management and non-diversified structure expose it to higher volatility and concentration risk. Additionally, while MBS IOs are generally secure, they can face prepayment risk if homeowners refinance during rate declines. However, RISR's tactical adjustments to duration and credit quality mitigate these risks.

Conclusion: A Strategic Play for Rate Uncertainty

As the Fed's tightening cycle continues and market uncertainty lingers, RISR offers a rare combination of income generation, duration flexibility, and rate-hedging capabilities. Its 6.42% yield, active management, and proven performance in rising rate environments make it a compelling addition to diversified portfolios. For investors seeking to navigate the next chapter of the rate cycle with resilience and income, RISR is a strategic tool worth considering.

In a world where traditional fixed-income assets struggle to keep pace with inflation, RISR's innovative structure and active approach position it as a standout option for those who want to hedge, not just speculate.