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Fixed Income

Nothing’s Shocking.

Nancy Davis, Quadratic CIO and portfolio manager for IVOL ETF, is a fan of the early 90's progressive rock band Jane's Addiction. So when it comes to the selloff in 2022 across equities and credit, their seminal album title "Nothing's Shocking" comes to mind. Year-to-date, the S&P 500 is down -18.4%, the Nasdaq is down -28.7%, Investment Grade bonds are down -15.1%, and High Yield bonds are down -10.4%1.

The threat of stagflation is looming. The Fed has adopted its most hawkish stance in decades, and investors worry that the “Fed Put” is a thing of the past. Over the course of 2022, credit spreads are wider and equities lower. Corporate bonds feeling pain from both sides is not surprising as higher prices, the labor shortage, supply-side disruptions, and cratering consumer confidence (as measured by the University of Michigan index) is at 2008 lows. 

The Fed has hiked by 75bps, and the rates market expects an additional 180 bps of rate hikes still to come this year, with more to follow in 2023. Prices continue to increase, GDP shrank in Q1, and geopolitical tensions show no signs of abating. Bonds and stocks have sold off together. Investors are asking what's next and how to position portfolios when very little appears to be working. We believe the Quadratic Interest Rate Volatility and Inflation Hedge ETF (ticker: IVOL) may help in this environment.

Nancy thinks investors are currently in a particularly tricky environment. She recently told CNBC that while interest rate hikes may help bring things under control on the demand side, they will have little effect on the supply side. “The Fed hiking rates isn't going to put more truck drivers on the road or make Russia not invade Ukraine or get rid of COVID-zero policies around the world. It's not going to fix the supply side,” Nancy said. 

Nancy sees the Fed’s plan to reduce its balance sheet through quantitative tightening, set to begin in June, as bullish for going long fixed income volatility. Nancy believes quantitative tightening puts investors in unchartered and potentially volatile territory. She told one reporter, “We've never seen this quantitative tightening coupled with tighter policy growth rates at the same time.” 

In a separate interview with Market Watch, Nancy explained how IVOL can benefit from this potentially stagflationary environment. She noted that the options component of IVOL can potentially do well when the interest rate spread between short and long-dated rates increase and aims to serve as a hedge against rising fixed-income volatility. The fund holds inflation-protected Treasuries and has exposure to the differential between short- and long-term interest rates. 

IVOL, Under-the-Hood

IVOL is managed by Quadratic Capital Management, an asset management firm founded in 2013 by Nancy Davis. The firm's expertise in the options and volatility markets permits the construction of portfolios that seek to mitigate the downside risk while maintaining upside potential.

IVOL seeks to hedge relative interest rate movements, whether these movements arise from falling short-term interest rates or rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for enhanced inflation-protected income.

At the same time, the fund looks to provide investors with access to the over-the-counter (OTC) interest rate options market – a market previously reserved for sophisticated institutional investors – to provide structured solutions that offer an attractive risk/reward profile.

IVOL combines OTC options on the interest rate markets that are typically only available to institutional investors with U.S. inflation-protected treasuries (TIPS). This combination provides an exposure that is different than the traditional 60/40 portfolio. IVOL has the potential to do well with lower front-dated yield expectations, typically occurring in a more risk-off environment when equities and bonds are selling off or in a higher inflation expectation environment.

IVOL Performance


1.) Year-to-date data from Bloomberg as of 5/24/2022. S&P 500 Index: is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the US. Nasdaq returns based on The Nasdaq Composite index: is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. Investment Grade bond returns based on The Markit iBoxx USD Liquid Investment Grade Index: designed to reflect the performance of US Dollar (USD) denominated investment grade corporate debt. High Yield bonds based on The iBoxx iShares High Yield Corporate Bond Index (HY): designed to reflect the performance of USD denominated high yield corporate debt.