ETF newcomer Ionic Capital Management rolled out an exchange-traded fund Wednesday designed to do well during periods of inflation. The Ionic Inflation Protection ETF (CPII) invests in inflation swaps; interest rate options or “swaptions”; and U.S. Treasury securities mainly in the form of U.S. Treasury inflation-protected securities (TIPS).
CPII comes with an expense ratio of 0.70% and lists on the NYSE Arca.
“It is critical that institutional and retail investors find ways to mitigate the destructive elements of sustained elevated inflation,” said Doug Fincher, a portfolio manager with Ionic Capital Management.
The new fund is intended to provide investors the inflation mitigation they need. It will typically hold roughly 30% of its portfolio in five-year zero-coupon inflation swaps linked to the level of the CPI, and will rise in value when inflation increases above the rate the swaps are tied to. It will also use the interest rate swaps and swaptions that benefit from increasing interest rates and volatility.
Fincher notes that while the July 13 Consumer Price Index (CPI) print for June could be around 10% according to industry chatter, the long-term expectations for inflation are only around 3%.
“Something's got to give. We're relative value investors by nature, so that spread is appealing to us,” he added. “The big arbitrage is that spread between the CPI readings that we see every month, and long-term inflation expectations that are much lower.”
He explained that the TIPS portion of the portfolio merely protects against inflation, while the inflation swap component of the strategy is what produces the fund’s added returns.
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