Ionic's CPII Rides High on Inflation Reality

As pundits, economists and politicians ramble on about where inflation is heading, one scrappy, little exchange traded fund has been quietly taking advantage of the reality that prices are simply higher and may remain so. 

The Ionic Inflation Protection ETF (CPII), which started in July 2022, is an actively managed fund designed to benefit from the current higher inflation and interest rate environment. The ETF is the product of the $4 billion, New York-based hedge fund shop, Ionic Capital Management. 

CPII is riding on a tight little wave of annual inflation at 3.7% and a federal funds rate of between 5.25% and 5.5%, despite forecasts for lower inflation and up to three interest rate cuts by the Federal Reserve this year. In recent weeks, the U.S. central bank is targeting 2% for inflation and has been increasingly cautious about rate cuts. 

So far this year, CPII is up 4%, which compares to a 1.7% decline by the iShare Core U.S. Aggregate Bond ETF (AGG).

“This strategy has done exactly what we expected it to do,” said Doug Fincher, Ionic Capital portfolio manager.

The strategy, which Ionic employs in varying degrees inside separate accounts for institutional clients, uses swaps and call options to benefit from both the ailment of inflation and the cure of higher interest rates.

Benefiting From Higher-for-Longer Rates

In basic terms, the swap investing strategy involves paying a price based on the expectation for inflation and then being paid a price based on the actual rate of inflation.

“We’re taking advantage of the fact that reality is higher than expectations for inflation,” Fincher said. “The market’s forecasts for future inflation are just not very accurate.”

The other main lever in the strategy uses something called swaptions, which are options pegged to interest rates that can be sold at a higher price if rates rise.

“There have been periods like last fall when the 10-year Treasury yield went to 5%,” Fincher said. “A lot of the performance in this fund has been on the rates side.”

The fund is also anchored with investments in short-term Treasury Inflation Protected Securities (TIPS), which are designed to protect principal while keeping up with inflation.

Although CPII, which charges 70 basis points, is working well in the current economic environment, Fincher admits the performance won’t be as strong in a cycle of falling interest rates and falling inflation.

This is the first ETF for Ionic, which saw an opportunity to enter the space. But Fincher said this isn’t likely the beginning of a larger ETF footprint.

“We’re not an ETF firm or a marketing powerhouse,” he said, acknowledging the fund’s assets at just $14 million is a long way from hitting the radar screens of financial advisors who often avoid smaller ETFs.