Hedging ETF Debuts

New fund allows investors to hedge interest rate, inflation risk.

Today ETF newcomer Quadratic Capital rolled out a first-of-its kind ETF designed as a hedging tool under KraneShares’ exemptive relief. The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) is actively managed and mainly invests in U.S. TIPS and long interest-rate options.

IVOL comes with an expense ratio of 0.99% and lists on the NYSE Arca.

“We see this as an access vehicle helping to democratize financial markets and give investors more choices [with regard to] an asset class they can’t [access] on their own,” said Quadratic Capital founder and CIO Nancy Davis, noting that the purpose of the fund is to make institutional-type access available to everyone, essentially providing democratization to financial markets.

“For the majority of most people, their net worth is tied up in real estate, in their home. The cost of interest rates and the cost of borrowing money is the largest component in anyone’s portfolio,” she added.

Approach

IVOL is meant to allow investors to hedge interest rate volatility by investing in TIPS, which protect against inflation risk, and in options on the U.S. interest rate swap curve, such that the options increase in value as the curve steepens during times of increasing interest rate volatility, and decrease as it flattens during times of declining interest rate volatility, the prospectus says. As Davis puts it, the fund is “long fixed income volatility.” 

Generally, the fund will invest less than 20% of its assets in option premiums, the document notes.

According to Quadratic, the fund can serve as a hedge for fixed income, equities, real estate and volatility.

Contact Heather Bell at [email protected]