As trade tensions heighten with China, an increasing number of investors are looking for portfolio hedges to mitigate volatility and growing risk. To this end, investors and institutions are turning their attention towards safe havens like bonds, driving the price of debt up, and interest rates down as a result. Interest rates have a significant effect on economic growth, inflation, the housing market, equity valuations, bond valuations, and even gold prices.

One financial institution, Quadratic Capital Management, is looking to capitalize on the changing interest rate environment. Earlier this month Quadratic debuted its first exchange-traded fund, the Quadratic Interest Rate Volatility and Inflation Hedge ETF (NYSEArca: IVOL).

According to Quadratic, “IVOL is a first-of-its-kind fixed income ETF which seeks to hedge against an increase in inflation, and to profit from an increase in interest rate volatility and a steepening of the yield curve, whether that occurs via rising long-term interest rates or falling short term interest rates. A steepening yield curve has historically been associated with large equity market declines.”

The general direction of the yield curve for any interest-rate environment is typically measured by comparing the yields on two- and 10-year issues, but the difference between the federal funds rate and the 10-year note is often used as well.

Quadratic’s Managing Partner and Chief Investment Officer Nancy Davis founded Quadratic in 2013 around her unusual style of derivatives-based macro investing.

Speaking to ETF Trends and ETFdb.com, Davis explained the benefits of this new fixed income ETF.

“What makes IVOL unique is that it is long interest rate volatility via its access to the OTC fixed income options market,” Davis said. “No other active or passive ETF has provided its investors access to this market before. This access is the key to IVOL’s many applications and allows it to potentially benefit from normalization of the yield curve while seeking to provide inflation protection. IVOL is a first-of-its-kind ETF which is designed to hedge the risk of an increase in fixed income volatility and/or an increase in inflation expectations. It also seeks to profit from a steepening of the yield curve, whether that occurs via rising long-term interest rates or falling short term interest rates, which are historically associated with large equity market declines.”

Davis said IVOL is a diversifier product for portfolios, and it’s not another ‘me too’ product.

“Think about the assets that have poured into floating rate loans, min-vol stocks, all those things,” she said. “Why are people buying those? It’s because they want something diversifying. But in many cases they are buying very expensive credit or fully valued stocks. So it’s exciting for us to do something that’s really different, really innovative, and really useful for investors. We’ve given everyone — regular people and large institutions — exposure to an asset class that previously wasn’t available to most of them. And it’s a product that I think accomplishes what they’re trying to accomplish much better than the tools they are using now.”

According to Quadratic, IVOL may provide a potential hedge for numerous components of an investor’s portfolio, and has many applications for investors including:

  • Fixed Income: IVOL seeks to provide steady, inflation-protected income, a hedge against increasing inflation, and a potential asymmetric payoff when long-term interest rates become higher than short-term interest rates.
  • Equities: IVOL may act as a tail hedge, as historically the curve has steepened in large equity sell-offs.
  • Real Estate: IVOL may help hedge the risk of real estate asset depreciation brought on by rising long term interest rates.
  • Volatility: IVOL seeks to provide an attractive new means through which investors can add long volatility exposure without some of the structural drawbacks of current offerings in the market.

For more information about the IVOL ETF, visit https://www.ivoletf.com/.

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