Transcript

Hi, I'm Nancy Davis. I'm the founder of Quadratic Capital and the portfolio manager for the Quadratic Interest Rate Volatility and Inflation Hedge ETF ticker IVOL, I-V-O-L.

TIPS and the Founding of Quadratic Capital Management

When I started my career in the late 90s at Goldman Sachs, that was right when the U.S. Treasury Department invented the TIPS market, which are Treasury inflation protected securities. I remember being a young trader at Goldman and thinking, oh my goodness, this is name only. It says inflation in the name, but all of these bonds are long duration. They're all going to lose money when inflation expectations increase because interest rates will increase in this environment. And then the other big problem with TIPS alone is the only index used to measure inflation within TIPS is the Consumer Price Index (CPI). The CPI is the only index used to reset TIPS. The big problem with TIPS by themselves is a third of the CPI is what they call Shelter, and it's actually rent.

So many investors just want other exposures, other ways to measure inflation beyond using one index. Quadratic Capital Management was founded in 2013. The firm was started to provide access to the OTC rates markets. And the rates market is a huge market. It's about five times the size of the stock market. Most investors do not have access to that market because it does trade OTC. We own options inside of our fund giving investors access to OTC interest rate volatility to potentially benefit from rising correlations, and when volatility increases in investors’ portfolios.

The Quadratic Interest Rate Volatility & Hedge ETF: IVOL

Our first ETF was listed in 2019. IVOL is invested 80% in TIPS. And then we add fully funded interest rate options to the portfolio. We do this to access another measure, another index for inflation expectations outside of just the Consumer Price Index. I love owning options because it's a different way of managing risk. With an option you have that defined downside, which is limited to the premium that you pay.

The Features and Applications of IVOL

Many investors use IVOL as part of their core fixed income portfolio. The reason that they do this is that most managers are benchmarked to the Bloomberg AGG index. The AGG index has no inflation protection inside of it, no TIPS whatsoever. And then a third of that index is actually short fixed income volatility because of its exposure to mortgages. So our investors will use IVOL to help add inflation expectations to reduce the short volatility embedded in mortgages, and then to take spread risk without adding more credit risk. IVOL has shown very low correlations to common asset classes. This is because IVOL is long interest rate volatility, and when volatility increases in the market there is price volatility and that potentially benefits IVOL from that disruption.

A Multifaceted ETF for a Variety of Macro Environments

One of my favorite things about IVOL is it's so versatile. It can benefit from many different macro environments, whether it's a risk-off environment with higher interest rate volatility and the Fed cutting rates, or a risk-on environment where people sell their Ten Year Treasuries to take on more risk in other asset classes like equities. IVOL can also potentially do well in a stagflationary environment.

IVOL & Monthly Distributions

Another benefit of IVOL is, historically, it has a steady monthly distribution. IVOL has paid 30 basis points every month for over four years in a row. Innovation is something you don't see with a lot of strategies. Many asset managers use very similar strategies that replicate indices. With IVOL we're accessing something truly different.

For more information about investing in the fund, please visit our fund website, which is IVOLetf.com. That's I-V-O-L etf.com. And to learn more about investing with ETFs please visit KFAfunds.com. Thank you for watching.

This material contains Nancy Davis' opinion. It should not be regarded as investment advice or a recommendation of specific securities.

For IVOL standard performance, top 10 holdings, risks, and other fund information, please click here.