The ETF Play on Inflation and Interest Rate Volatility (w/ Nancy Davis)

Nancy Davis, founder and CIO of Quadratic Capital Management, introduces her new ETF that takes advantage of interest volatility and inflation expectations: IVOL. In this interview with Real Vision’s co-founder & CEO Raoul Pal, Davis deconstructs the structure of the ETF, highlights the cost of carry associated with the strategy, and discusses her macro outlook and where she thinks the yield curve is headed next. Filmed on May 29, 2019.

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The ETF Play on Interest Rate Volatility (w/ Nancy Davis)
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Transcript:
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NANCY DAVIS: So we invest with options with a directional bias on everything. So our new
product that we recently launched, IVOL, is the first inflation expectations and interest rate
volatility fund out there. It's a exchange traded product.
RAOUL PAL: Does anybody even know what that means?
NANCY DAVIS: So what we do is for an investor, if you're an equity investor, you want to have
tail protection, for instance. It's hard to own equity volatility as an asset allocation trade because
it decays so aggressively. So it's a more benign way to carry volatility as an asset class from the
long side using fixed income vol. It's not as sensitive as equity vol, but it's a lot lower level. Like,
the vol we're buying is 2, 2 basis points a day in normal space. So it's very, very cheap, in my
opinion, and it gives you a way to have an asset allocation to the factor risk of volatility without
having as much decay as you would in the equity space.
And then for a fixed income investor, the big risk there is obviously Central Bank policy, fiscal
spending, trade wars, as well as inflation expectations. And we saw a need to really give a fixed
income investor a way to capitalize on the deflation that's been priced into the market for the next
decade. I mean, so current US inflation is around 2%. The five-year break-even is 1.59%. So
that's an opportunity in an option space. And so it's long options with TIPS.
And so that gives investors exposure. It gives you inflation-protected income, but also options that
are sensitive to inflation expectations. And we think it's pretty-- you know, you're never going to
time these macro calls perfectly. But given the Central Bank in the US is so focused right now on
increasing inflation expectations, and there's been so much talk about the yield curve inverting--
and that's kind of crazy.
If you step back and you're like, all right, we have a $3.9 trillion balance sheet. We have a fiscal
budget deficit. We have unclear or radically changing monetary policy. If you look where we are
now with so many cuts priced into the interest rate markets in the US versus where we were four
months ago, it's wildly different. And at the same time, interest rate volatility is literally at
generational lows.
Equity, while people talk about equity vol, I think VIX today is 17. It's low, I guess, in the context.
But when you look at a percentile, like one-year vol over the last decade in equities, it's about the
70th percentile. So it might be low, but it doesn't mean it's cheap.
Interest rate volatility is literally at, like, 2, 1, you know, 0.

Видео The ETF Play on Inflation and Interest Rate Volatility (w/ Nancy Davis) канала Real Vision Finance