How to Address Low Yields and Rising Rates

Image of Jonathan Browne
Jonathan Browne
Inflation continued to surge last month — with prices rising more than expected and at the fastest pace in more than 30 years.

Despite your views, it's all over the news.

BLOOMBERG: "Investors throw cash at any ETF with inflation in the name." 

INVESTING.COM: "Inflation readings come in screaming hot."

YAHOO FINANCE: "Google searches reveal people are growing very worried about inflation."

The accelerating pace of inflation is one of the main economic trends of 2021. Higher rates of inflation have the potential to erode the value of investment portfolios, reviving memories of the 1970s, when large U.S. stocks and bonds took it on the chin. Robinson Capital manages an ETF portfolio that may serve as an inflationary hedge in an investment portfolio.

Robinson Alternative Yield Pre-Merger SPAC ETF (SPAX) is designed to invest exclusively in pre-merger SPACs because that is the only time in a SPAC’s life in which it behaves as a bond. The intent of the strategy is to provide a higher yielding and less volatile alternative to traditional fixed income and/or absolute return strategies.

 

CPI Chart Source: https://nypost.com/2021/11/10/inflation-spikes-6-2-percent-most-in-over-30-years/

Bloomberg Headline Source: https://www.bloomberg.com/news/articles/2021-11-09/cash-is-being-thrown-at-every-etf-with-inflation-in-the-name

Investing.com Headline Source: https://www.investing.com/analysis/inflation-readings-come-in-screaming-hot-200608220

Yahoo Finance Headline Source: https://finance.yahoo.com/news/google-searches-reveal-people-are-growing-very-worried-about-inflation-163908703.html?_fsig=p6k6I5UKkKf5B5fr216ckg--%7EA

SPAX INVESTS EXCLUSIVELY PRE-MERGER SPACs

The Fund invests exclusively in pre-merger SPACs because that is the only time in a SPAC’s life in which it behaves as a bond. In fact, SPAX remains the only ETF that has specifically hard-coded into its prospectus that it must not hold any SPACs after the completion of a merger. The intent of the Fund is to provide a higher yielding and less volatile alternative to traditional fixed income and/or absolute return strategies.

4 POTENTIAL BENEFITS OF USING PRE-MERGER SPACs DURING IN A RISING RATE ENVIRONMENT

  1. Higher Yield: while pre-merger SPACs don’t generate income, they do have a yield due to their redemption date and value. The entire pre-merger SPAC universe had a yield-to-worst (i.e., that implies that none of the SPACs ever finds a merger partner) of 2% at the end of the quarter—the yield of the overall investment grade bond market as measured by the Barclays Aggregate Bond Index (the entire investment grade investable domestic bond market) was 1.6%.
  2. Downside Mitigation: pre-merger SPACs have the credit and interest rate risk of T-Bills (AAA rating), whereas the Barclays Aggregate Bond Index has an average credit quality of AA (a notch below the credit rating of Treasuries) and a duration (a measure of a bond’s sensitivity to changes in interest rates) of 6.7 years (a 1% rise in rates will lead to approximately a 6.7% price decline in the index).**
  3. Upside Potential: as we saw in Q3, any merger announcement shortens the time for the SPAC to earn back its discount; and, a positive market reaction to a merger announcement could push SPAC prices well above their redemption values.
  4. 40% Solution: higher yield, true downside mitigation, none of the interest rate or credit risk, and meaningful upside potential, provides a better 40% solution than traditional fixed income strategies.

** S&P ratings represent Standard & Poor’s opinion on the general creditworthiness of a debtor, or the creditworthiness of a debtor with respect to a particular debt security or other financial obligation. Ratings are used to evaluate the likelihood a debt will be repaid and range from AAA (excellent capacity to meet financial obligations) to D (in default). In limited situations when the rating agency has not issued a formal rating, the security is classified as non-rated (NR).

Blog posts

Related Articles

What is a SPAC by Robinson Capital
Image of Jonathan Browne
Jonathan Browne

What is a Special Purpose Acquisition Company (SPAC)?

What is a SPAC?

A Special Purpose Acquisition Company (SPAC), also known as a blank check company,...

Read more
Are ETFs the Ultimate SPAC Wrapper
Image of Jonathan Browne
Jonathan Browne

Are ETFs the Ultimate SPAC Wrapper

At the time of this writing, there were over 400 SPACs searching for merger targetsThe amount of...

Read more