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Currently, inflation seems to be spreading across the entire supply chain, from components and commodities, all the way to end consumer products. With a tight labor market, high energy prices, supply chain issues and a strong consumer, elevated levels of inflation are unlikely to dissipate in the near-term. In response to this persistently high inflation, central banks are aggressively raising rates and rolling back bond buying programs. Rising interest rates are increasing costs for companies globally and putting pressure on the broader markets. And, as inflationary pressures permeate across the economy, both equity and debt markets are facing challenges. Options-based strategies designed to target rising rates and volatility can potentially mitigate these risks and serve as alternatives for investors seeking an efficient or tactical hedge within their portfolios.
IRHG and IRVH can act as portfolio hedges in a low-cost manner with the liquidity benefits of the ETF vehicle. IRHG is designed to be functionally similar to owning a position in long-dated put options on longer term U.S. Treasury bonds through the use of derivatives contracts. IRHG uses interest rate payer swaptions, which offer investors the ability to hedge interest rate risk in their fixed income portfolio allocation. IRHG is designed to benefit when interest rates rise, unlike traditional fixed income instruments.
IRVH combines over-the-counter options on the interest rate markets with U.S. Treasury Inflation-Protected Securities (TIPS). 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. The strategy seeks to navigate these complex market environments by holding over-the-counter curve options and TIPS.
"Options-based strategies can help to ameliorate the difficult market conditions that investors face in inflationary and rising rate environments. Compared to traditional equity market opportunities, interest rate strategies using options can provide greater diversification and potentially stronger risk-adjusted returns in a rising rate environment" said Rohan Reddy, Director of Research at Global X. "While we continue to see headwinds in the market, IRHG and IRVH combine Global X's expertise in options-based strategies with active management to offer alternatives for investors looking to diversify or hedge their portfolios against interest rate and inflationary risks."
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Under normal circumstances, IRHG generally expects to invest less than 25% of its assets in options, and to actively manage options investments to reduce the weight of such options in the fund's portfolio if their value increases above 25% of the fund's assets. IRHG's remaining assets will generally be invested in cash or U.S. Treasury bills.
IRVH, under normal market conditions, generally expects to invest less than 20% of its assets in yield curve spread options and to actively manage options investments to reduce the weight of such options in the fund's portfolio if their value increases above the desired amount. Similarly, IRVH generally expects to sell portfolio investments and reinvest proceeds in yield curve spread options if the value of such options declines below the desired amount.
Both IRHG and IRVH have expense ratios of 0.45%.
About Global X ETFs
Global X ETFs was founded in 2008. For more than a decade, our mission has been empowering investors with unexplored and intelligent solutions. Our product lineup features more than 90 ETF strategies and over $40 billion in assets under management.[ii] While we are distinguished for our Thematic Growth, Income, and International Access ETFs, we also offer Core, Commodity, and Alpha funds to suit a wide range of investment objectives. Explore our ETFs, research and insights, and more at www.globalxetfs.com.
Global X is a member of Mirae Asset Financial Group, a global leader in financial services, with more than $628 billion in assets under management worldwide.[iii] Mirae Asset has an extensive global ETF platform ranging across the U.S., Brazil, Canada, Colombia, Europe, Hong Kong, India, Japan, Korea, and Vietnam with over $84 billion in assets under management.[iv]
Dukas Linden Public Relations
Diversification does not ensure a profit or guarantee against a loss. Investing involves risk, including the possible loss of principal. The Funds engage in options trading. An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date. In an interest rate swap option, the Fund has the right, but not the obligation, to enter a swap contract at a future date, where the Fund pays a fixed interest rate and receives a floating interest rate. The Fund is expected to benefit from the options it holds if long-term U.S. interest rates rise during the time period in which the Fund holds the options. However, if long-term rates decrease, the Fund will lose money on the options, up to the amount invested in option premiums, and underperform an otherwise identical bond fund that had not used such options. Options may subject the Fund to greater volatility than investments in traditional securities and may magnify the Fund's gains or losses.
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Over-the-counter options are traded directly between counterparties rather than on a centralized exchange. Such options may trade less frequently and in limited volumes and thus exhibit more volatility and liquidity risk.
TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. The Funds are non-diversified.
The Funds are actively managed, which could increase its transaction costs (thereby lowering its performance) and could increase the amount of taxes you owe by generating short-term gains, which may be taxed at a higher rate. There is no guarantee that the Funds will achieve their stated investment objectives. The Funds are subject to increased credit and default risk, where there is an inability or unwillingness by the issuer of a fixed income security to meet its financial obligations, debt extension risk, where an issuer may exercise its right to pay principal on an obligation later than expected, as well as interest rate/maturity risk, where the value of the Fund's fixed income assets will decline because of rising interest rates.
Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.
Carefully consider the Funds' investment objectives, risks, and charges and expenses before investing. This and other information can be found in the Funds' summary or full prospectuses, which are available at globalxetfs.com. Please read the prospectus carefully before investing.
Global X Management Company LLC serves as an advisor to Global X Funds. The Funds are distributed by SEI Investments Distribution Co. (SIDCO), which is not affiliated with Global X Management Company LLC or Mirae Asset Global Investments. Neither SIDCO, Global X nor Mirae Asset Global Investments are affiliated.
[i] Global X, as of 5 July 2022
[ii] Global X, as of July 2022
[iii] Mirae Asset, as of May 2022
[iv] Mirae Asset, as of July 2022
SOURCE Global X Management Company LLC
Filed Under: Business
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