Simplify Asset Management has launched an innovative ETF aimed at protecting investors from a sharp decline in long-term interest rates.
Simplify now offers a pair of ETFs designed to hedge against significant movements in long-term interest rates, whether sharp increases or steep declines.
The Simplify Downside Interest Rate Hedge Strategy ETF (RFIX US) is now trading on the NYSE with an expense ratio of 0.50%.
RFIX achieves its hedging strategy by utilizing a 7y20 receiver swaption struck at 2.75%. This liquid over-the-counter derivative provides Simplify the option, in seven years, to enter a swap contract based on the 20-year US Treasury bond yield.
As a receiver swaption, Simplify would receive a fixed rate of 2.75% while paying the floating rate, which would be the 20-year Treasury yield at that time.
The swaption generates profits at maturity if the 20-year Treasury yield falls below 2.75%. Currently, as of 16 December, the yield stands at 4.67%. Its value fluctuates daily based on market expectations—any sharp decline in projected future interest rates would result in an immediate increase in both the swaption’s value and the ETF’s net asset value.
Simplify emphasizes that the strike price, time to expiry, and underlying rate maturity of the swaption were meticulously chosen to balance cost efficiency with robust downside protection.
Harley Bassman, Managing Partner at Simplify Asset Management, commented: “At Simplify, we are always looking for ways to provide investors with innovative tools that provide access to useful and compelling strategies. RFIX was designed to provide a transparent and capital-efficient solution for those looking to express a bullish view on bonds and hedge against potential risks. By incorporating OTC derivative profiles typically reserved for institutional investors, RFIX represents an important step in democratizing access to a strategy whose time very much may have arrived.”
RFIX complements the firm’s existing $170 million Simplify Interest Rate Hedge ETF (PFIX US) which provides protection against rising long-term interest rates. Both funds share a 0.50% expense ratio. Since launching in 2021, PFIX has achieved a 5-star Morningstar rating within the Inflation-Protected Bond category, demonstrating its strong risk-adjusted returns.
Investors in both ETFs benefit from daily liquidity and simplified tax reporting, as the funds do not require K-1 tax forms.