June brought a reprieve from interest rate hikes but the potential for two more rate increases this year. The Quadratic Deflation ETF (BNDD) is well-positioned for slowing growth and is a top-performing bond ETF year-to-date.
The majority of Fed officials indicated at the June FOMC meeting that rates could be raised two more times before the end of the year. Higher rates for longer could bring further economic slowing that funds like BNDD seek to capitalize on.
Daily treasury yields in the last ten months climbed to levels not seen since the Financial Crisis in 2008. Short-term Treasury yields soared significantly above longer-term Treasuries in recent months and the yield curve remains deeply inverted.
Image source: Advisor Perspectives
Capitalize on Slower Growth With BNDD
BNDD is a fixed income, ESG-focused, actively managed ETF. KFA Funds, a KraneShares company, subadvises the fund.
The fund seeks to benefit from lower growth and a reduction in the spread between short- and long-term interest rates. It also benefits from deflation and lower or negative long-term interest rates. According to KFA, the fund’s strategy profits when yields are declining on the 30-year Treasury or when short-term rates are rising.
BNDD seeks to hedge against deflation risk while creating positive returns at times when the U.S. interest rate curve flattens or inverts. It invests in long-duration Treasuries with different maturities either directly or via ETFs that invest in Treasuries.
BNDD is a top-performing bond ETF in the last week and YTD. The fund is one of the top 5 performing bond ETFs in the last month, up 4.56% in returns according to FactSet data. BNDD is up 7.19% year-to-date, a top 10 bond ETF by returns for the year.
The fund uses options tied to the U.S. interest rate curve and traded on the OTC market. These include long options, long spreads, and butterflies (an options strategy that uses both bear and bull spreads). All options utilized attempt to limit loss by the fund and enhance returns.
BNDD carries an expense ratio of 0.96% with fee waivers that expire on August 1, 2023.
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