Market Overview

Quadratic Capital Enters ETF World With Unique Bond Fund

Quadratic Capital Enters ETF World With Unique Bond Fund

Quadratic Capital Management, a Connecticut-based alternative asset manager, entered the exchange traded funds industry with the launch of the Quadratic Interest Rate Volatility and Inflation Hedge ETF (NYSE: IVOL).

What Happened

Quadratic Capital was founded by Nancy Davis, who spent 10 years at Goldman Sachs Group Inc. (NYSE: GS). For seven of those years, Davis was a member of Goldman's proprietary trading group where she would eventually become the head of credit, derivatives and over-the-counter trading.

The Quadratic Interest Rate Volatility and Inflation Hedge ETF is an actively managed ETF.

Why It's Important

The new IVOL looks “to hedge against an increase in inflation, and to profit from an increase in interest rate volatility and a steepening of the yield curve, whether that occurs via rising long-term interest rates or falling short term interest rates,” according to Quadratic Capital.

IVOL provides exposure to the OTC markets, which have previously been the territory of high-level, professional traders, to a broader swath of investors.

Another marquee element of IVOL's methodology is to provide a buffer against a steepening yield curve, a scenario that can be triggered by either rising long-term rates or declining short-term rates. A steeper yield curve has previously been a reliable recession indicator.

IVOL can provide protection against rising inflation and potentially serve as a guard against equity market declines, a scenario that often follower steepening yield curves.

What's Next

IVOL's initial portfolio is comprised mostly of Treasury Inflation-Protected Securities (TIPS) with some exposure to dynamic fixed income options.

“OTC options may produce greater returns during periods of fixed income volatility and increasing inflation. Downside is limited to the initial premium paid to buy the options,” according to Quadratic Capital.

IVOL's annual fee is 0.99%, or $99 on a $10,000 investment.

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