Quadratic Interest Rate Volatility and Inflation Hedge ETF

IVOL

Market cap $445M

The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL) historically outperforms during periods of fixed income stress. It's a strong contender when inflation and interest rate volatility threatens, provides mitigation for a stagflation environment, and offers strong performance year to date.

Fed chair Powell acknowledged chances of higher inflation and slower growth amid Trump tariffs.

IVOL's underperformance stems from high volatility swaptions, despite correct market views on 2s10s normalization. The ETF's composition remains unchanged, with significant exposure to SCHP and swaptions on the 2s10s spread. High ROC utilization in IVOL leads to lower NAV, making SCHP a better standalone investment.

IVOL offers retail exposure to advanced interest rate derivatives typically only available to institutional traders, providing a way to bet on the steepening yield curve and macro dynamics. IVOL's holdings include TIPS and options on constant maturity swaps. We deconstruct these holdings and go through the implications. Performance is tied to the steepening yield curve, inflation expectations, and macroeconomic factors, making it a pure play macro bet.

Thought leaders and portfolio managers across the industry weighed in on the direction of fixed income investments during the Q3 Fixed Income Symposium hosted by VettaFi.

The Quadratic Interest Rate Volatility and Inflation Hedge ETF holds a portfolio of TIPS bonds and curve steepeners. With the Fed likely on hold until inflation declines, I believe the yield curve may stay inverted and act as a headwind for IVOL. Until macro conditions change, the IVOL is unlikely to outperform.

During a recent appearance at the Economic Club of New York, JPMorgan Chase JPM CEO Jamie Dimon expressed concerns that the U.S. economy could witness challenges similar to those of the 1970s. He indicated the likely resurgence of stagflation — a condition characterized by low growth combined with high inflation — which could complicate inflationary risks currently being faced by the U.S. economy, as quoted on a Yahoo Finance article.

The Quadratic Interest Rate Volatility and Inflation Hedge ETF is breaking out to the upside amid falling real yields and a steepening yield curve. IVOL should benefit from the ongoing deterioration in government finances, which should drive real yields lower across the board and a normalisation of the yield curve. The main risk comes from the ETF underperforming its stated objectives.