Capturing Inflation Expectations | ETF Trends

Key Takeaways

  • Based on expected monetary and fiscal policies for the year ahead, many advisors are thinking about how to manage rising inflation.
  • Demand for inflation-protected fixed income ETFs has increased in the past year, with the sub-category gathering $16 billion in the same time frame, according to CFRA.
  • Quadratic Interest Rate Volatility and Inflation ETF (IVOL) pulled in approximately $350 million of new money in January and has outperformed its larger peers by utilizing options to augment exposure to a traditional inflation measurement.

Fundamental Context

The Consumer Price Index (CPI) rose 1.2% year to year in the fourth quarter of 2020 but is likely to climb higher, focusing investors on the risk of rising inflation. According to Action Economics, from which we display data on MarketScope Advisor, CPI should increase by 1.8% and 3.3%, from the prior 12-month period, in the first and second quarters of 2021, respectively. In January, investors put $3.7 billion into inflation-protected fixed income ETFs, continuing a trend dating back to 2020. Indeed, for the 12-month period ended in January 2021, this sub-category of fixed income ETFs pulled in $16 billion and ended the month with $65 billion. Most of these ETFs take an index-based approach using Treasury Inflation-Protected Securities (TIPS). However, IVOL actively augments an index strategy tied to CPI with fully funded long options that take a more market-based approach to inflation expectations measured by the OTC swap curve. IVOL puts 85% of its assets into Schwab U.S. TIPS ETF (SCHP) with the remainder actively managed.

Quadratic Capital Management Managing Director and Chief Investment Officer Nancy Davis explained to CFRA in an exclusive interview that CPI is like the Dow Jones Industrial Average for equity investors. The Dow is one way to measure market sentiment, but it is not representative of the broader equity market. To Davis, the big problem with CPI, which was created by the Bureau of Labor Statistics, is that one-third of the basket is shelter. Yet, anyone living in an urban area can see that rent levels are falling due to the pandemic.

Table 1: Performance of Most Popular Inflation-Protected ETFs

Ticker 1 Year Total Return (%)  Net Inflows ($M) Assets ($B)
IVOL 15.6 347 1.3
SPIP 9.7 241 2.4
SCHP 9.3 517 14.6
TIP 9.3 1,134 27.6
STIP 5.4 471 3.4

Source: CFRA’s First Bridge ETF Database. As of January 29, 2021.

By using options, IVOL also provides defined downside protection. According to Davis, this helped in March 2020, when the market had lower inflation expectations. The ETF was up 80 basis points, even as peers declined in price. According to CFRA, a more active approach to managing inflation proved fruitful for IVOL, as the ETF rose 16% in the one-year ended January 2021, significantly outperforming the 9.7% gain for SPDR Portfolio TIPS ETF (SPIP) as well as the 9.3% gain for SCHP and iShares TIPS Bond ETF (TIP). At the end of January, IVOL had $1.3 billion in assets, despite launching only in May 2019.

Clients can find our full interview with Davis on the MarketScope Advisor platform this week and in the Thematic Research section after that. The video is also on YouTube at More info on how the fund is managed can be found here:


With the Federal Reserve’s new strategy of flexible inflation targeting and additional fiscal spending with the Democrats controlling both houses of Congress and the White House, investors have gravitated to inflation-protection fixed income ETFs. The funds can provide a complement to the traditional long-term Treasuries that make up a large portion of index-based core bond ETFs.

Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.