Stocks have recovered from last fall’s crash, low interest rates stretch out to the horizon and the VIX volatility index is half what it was at Christmas. Sit back and coast to a comfortable retirement.
No, don’t, says Nancy Davis. This veteran derivatives trader runs Quadratic Capital Management, where her somewhat contrarian view is that investors, all too complacent, are in particular need of insurance against financial trouble.
The Quadratic Interest Rate Volatility & Inflation Hedge ETF, ticker IVOL, is designed to provide shelter from both inflation and recession. Its actively managed portfolio mixes inflation-protected Treasury bonds with bets, in the form of call options, on the steepness of the yield curve.
Those options are cheap, for two reasons. One is that, at the moment, there is no steepness: Yields on ten-year bonds are scarcely higher than yields on two-year bonds. The other is that the bond market is strangely quiet. Low volatility makes for low option prices.
“Volatility has been squashed by central bank money printing,” Davis says, before delving deep into the thicket of option mathematics. If volatility in interest rates rebounds to a normal level, her calls will become more valuable. Alternatively, she would get a payoff if the yield curve tilts upward, which it has a habit of doing when inflation surges, stocks crash or real estate is weak.
If IVOL is all about peace of mind for the investor,