In a recent episode of “Behind the Ticker,” Nancy Davis, founder and CIO of Quadratic Capital, discussed her journey from Goldman Sachs to launching her firm, as well as the innovative strategies behind her ETFs, including IVOL and BNDD. Davis, who founded Quadratic in 2013 after spending ten years at Goldman Sachs, explained that her entrepreneurial leap was driven by the desire to start something new, embracing the learning curve of building a business from scratch.
About Nancy Davis and Quadratic Capital
Quadratic Capital initially started with managing separate accounts and a hedge fund before entering the ETF space in 2018. Davis was intrigued by the ETF structure for its tax efficiencies and saw an opportunity to address gaps in traditional fixed income products like the Aggregate Bond Index (AGG) and TIPS (Treasury Inflation-Protected Securities). IVOL, Quadratic’s interest rate volatility and inflation hedge ETF, was designed to complement core bond holdings, addressing issues in the AGG such as its lack of inflation protection and embedded short optionality through mortgages. IVOL provides investors with exposure to TIPS and the rates market, offering inflation protection and interest rate volatility hedging, which is generally inaccessible to individual investors.
Investment Strategy and Approach
Davis explained that IVOL’s portfolio consists of about 80% TIPS and is structured to give investors access to inflation expectations beyond the consumer price index (CPI). By providing exposure to interest rate volatility through long options, IVOL helps mitigate risk in fixed income portfolios during periods of rising volatility or unexpected rate cuts, as demonstrated during events like the March 2020 market turmoil.
The conversation also touched on BNDD, Quadratic’s deflation-focused ETF, which is designed for long-duration exposure to nominal treasuries. Davis highlighted that BNDD offers asymmetric exposure to interest rates without the leverage risks that are prevalent in other bond market products. While IVOL addresses inflation risks, BNDD offers protection during deflationary periods, making both ETFs complementary tools for managing interest rate risks in a portfolio.
Deeper Dive: Insights from the Full Conversation
Beyond the headline strategy, the full conversation between Brad and Nancy Davis covered several additional themes worth highlighting for advisors and investors.
On Process and Philosophy
So when you own an option, you're long-ball. We happen to own interest rate ball so it's just something else and I think that goes back to your point Bradley about the correlation. It doesn't look like everything else, right? It's not another strategy that's plus or minus 25 basis points to a benchmark index. So it's not always going to make money, you know, investing definitely involves risk but something that gives you access to something that you probably don't already have inside your portfolio.
So the market is already pricing that inflation will below that 2% target in the future, and so to me, I think it's just a great opportunity to say, look, interest rate ball doubt is down tremendously since Silicon Valley Bank. Nothing has really fundamentally changed at all, right, all those same issues exist of anything we're kind of facing a bigger fiscal situation, no matter who wins in November, nobody is talking about reducing our debt, right? It's just a question of where we're going to spend money, so I think it's a great time to help diversify the ag and have some exposure to inflation and inflation expectations in the future outside of CPI, because CPI is only calculated by the Bureau of Labor Statistics and a third of that index is rent, and then I just personally, I just don't like only being short volatility in my bond portfolio, like it makes me uneasy at night, and I don't think a lot of people realize that mortgages, although there is single case product, close your eyes, homeowners along the option, if you own the financial mortgage, you are short options to homeowners, and whenever your short options, your short ball, it's not equity ball, it's not the vix, it's actually fixed income ball.
TIPs are a pretty new market, it's just important for people to understand the treasury only started issuing inflation protected bonds in the late 90s. The only index is CPI and a lot of people just say, okay here's our core holding in the AG and we're going to add I-Gaw on top of that to add exposure to TIPs and also exposure to inflation expectations outside CPI. So correlation, I was looking at your correlation matrix, it's extremely attractive, so if you're sitting down with, you know, a portfolio manager that has an already diversified portfolio, where are you recommending I-Gaw gets a seat?
Notable Insights
"Most people have stocks and bonds in their financial portfolio, but the biggest asset cost in the world is interest rate, so we really see it as an access vehicle."
"Nothing has really fundamentally changed at all, right, all those same issues exist of anything we're kind of facing a bigger fiscal situation, no matter who wins in November, nobody is talking about reducing our debt, right?"
Key Takeaways
- IVOL, Quadratic’s interest rate volatility and inflation hedge ETF, was designed to complement core bond holdings, addressing issues in the AGG such as its lack of inflation protection and embedded short optionality through mortgages.
- IVOL provides investors with exposure to TIPS and the rates market, offering inflation protection and interest rate volatility hedging, which is generally inaccessible to individual investors.
- The conversation also touched on BNDD, Quadratic’s deflation-focused ETF, which is designed for long-duration exposure to nominal treasuries.
- Davis highlighted that BNDD offers asymmetric exposure to interest rates without the leverage risks that are prevalent in other bond market products.
- While IVOL addresses inflation risks, BNDD offers protection during deflationary periods, making both ETFs complementary tools for managing interest rate risks in a portfolio.
What This Means for Advisors
For financial advisors evaluating options for client portfolios, this conversation with Nancy Davis highlights important considerations around fixed income. Understanding the strategy behind each fund—not just the ticker—helps advisors make more informed allocation decisions and better communicate the rationale to clients.
The themes of fixed income and income investing discussed in this episode are particularly relevant in the current market environment, where advisors are increasingly looking for differentiated solutions that go beyond traditional benchmarks.
Listen to the Full Episode
This article is based on an episode of Behind the Ticker, hosted by Brad Roth, Founder and CIO of THOR Financial Technologies. For the full conversation with Nancy Davis, including additional nuances and details, listen on Spotify, Apple Podcasts, or watch on YouTube.