The debt ceiling negotiations remain the primary focus for markets in the final days of May. Investors piled into longer-duration bonds on worries of default risk, and the Quadratic Deflation ETF (BNDD) benefited.
Though President Biden and House Speaker McCarthy reached a deal on the debt ceiling over the holiday weekend, it appears to have notable opposition in the House. Over 30 Republicans vocally oppose the deal and a large swathe of Democrats are expected to vote no on the bill, reported CNBC.
Market uncertainty led to a muted performance in recent weeks as investors weighed U.S. default risk. A move from shorter-duration Treasuries boosted 20-year and beyond Treasury funds.
BNDD is one of the top 5 performing bond ETFs in the last week when market tension has been elevated. The fund is up 1.86% in the last week and 4.70% year-to-date, making it the 13th top-performing bond ETF YTD.
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.
The fund 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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