Bonds look increasingly attractive in the second half, given current yields and the indication of a Fed pause to interest rate hikes. Advisors and investors looking to broaden their bond exposures should consider the Quadratic Deflation ETF (BNDD), up 7% YTD on a total returns basis.
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 reduced 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 decline on the 30-year Treasury or when short-term rates rise.
It remains a strong performing bond ETF this year. BNDD is up 7.11% in total returns as of July 28 and up 5.01% on a price returns basis as of July 31. The fund crossed above its 50-day Simple Moving Average on June 7 and has held above it ever since. The ETF remains below its 200-day SMA but continues to trend upwards.
Advisors and investors are taking note of the fund this year. In the last month, BNDD experienced net flows of $16 million. Year-to-date the fund has net flows of $49 million.
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.
It also 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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