IVOL Continues to Outperform During Peak Bank Stress

The death knell for First Republic Bank could be tolling as shares continue to plummet on Friday. Banking sector stress and fears of contagion led to a flight to treasuries and other safe havens mid-March and benefited funds like the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) that invest in TIPS and along the yield curve.

First Republic Bank could be headed for FDIC receivership shortly, sources close to the matter told CNBC, as the company’s shares dropped precipitously Friday, fallings 40% with trading halted numerous times for volatility. Year-to-date, the company’s stock is down more than 90%, and the company has already received one $30 billion bailout from JPMorgan Chase and other major banks in the wake of Silicon Valley Bank and Signature Bank’s collapse.

In the week following the dual collapses of the two regional banks, the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) was an outsized winner, offering the top returns for all fixed income ETFs for the week as well as that month. It’s a trend that is repeating now as First Republic falters and signals potential failure.

IVOL has the top returns within fixed income ETFs in the last week at 2.54%, and as banking sector stress and volatility continues, it’s a fund worth consideration in the coming weeks and months.

Position for Bank Stress with IVOL

IVOL was the first ETF of its kind in active and passive options and offers access to the OTC fixed income options market, the mechanism it uses for long interest rate volatility, and is up 1.33% YTD. The fund invests in a mix of U.S. Treasury Inflation-Protected Securities (TIPS) of any maturity, which are U.S. government bonds whose principal amounts increase with inflation.

IVOL also invests in long options directly tied to the shape of the U.S. interest rate swap curve, which steepens when the spread between longer-term debt instrument swap rates and shorter-term debt instruments grows larger, flattens when the spread grows smaller, and inverts when the spread is negative.

The fund is currently above its 50-day Simple Moving Average and continues to spike above its 200-day SMA before retreating. Crossing above these thresholds is considered a buy signal for trend followers and funds flirting with rising above their 200-day SMA are ones to watch.

IVOL is actively managed by Quadratic Capital Management, an alternative asset management firm with experience in the options and volatility markets. It expects to invest less than 20% of the fund in option premiums and seeks to purchase options with a time-to-expiration between six months and two years.

IVOL carries an expense ratio of 1.05%.

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