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.
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.
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.
