ETF Wrap: Nancy Davis wants to be the ‘Vanguard of convexity,’ as she rolls out a new low-cost fixed-income ETF


Happy Thursday! I’ll be walking you through some of the big themes that MarketWatch is spotting in exchange-traded funds this week, including a chat with Nancy Davis, the chief investment officer and founder of advisory firm Quadratic Capital, where she discusses her actively managed, exchange-traded fund.

In the wake of the Federal Reserve’s big policy update on Wednesday, thinking about inflation or deflation seems fairly appropriate.

Send tips, or feedback, and find me on Twitter at @mdecambre to tell me what we need to be jumping on.

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The good and the bad
Top 5 gainers of the past week %Performance
Aberdeen Standard Physical Platinum Shares ETF 6.1
U.S. Global Jets ETF 2.6
Vanguard Extended Duration Treasury ETF 1.6
iShares 20+ Year Treasury Bond ETF 1.3
KraneShares Global Carbon ETF 1.2
Source: FactSet, through Thursday midday, Aug. 19, excluding ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater
Top 5 decliners of the past week %Performance
North Shore Global Uranium Mining ETF -13.9
Global X Uranium ETF -11.8
VanEck Oil Services ETF -5.4
Global X Copper Miners ETF -5.4
SPDR S&P Metals & Mining ETF -5.3
Source: FactSet
‘Vanguard of Convexity’

ETF Wrap caught up with Davis on Wednesday, as she pitched the merits of KraneShares Quadratic Deflation ETF, ticker “BNDD” on the NYSE’s Arca exchange. It is, perhaps, no coincidence that the ticker for Davis’s fund is close to that of Vanguard Total Bond Market ETF
as the portfolio manager is hoping to craft a suite of ETFs that offer investors, a la Vanguard’s low-cost options, better ways to hedge against an environment where investors are wrestling with surging inflation, negative and superlow interest rates in parts of the world and questions about how well the economy will rebound from the worst pandemic in over a century.

“My goal is to make Quadratic the ‘Vanguard of Convexity’ with our lower cost access products,” Davis said in emailed comments.

“These strategies are almost impossible for regular investors to do on their own and they benefit from our active management,” she said.

We asked Todd Rosenbluth, head of ETF & Mutual Fund Research, a regular commenter on ETF Wrap, if Davis’s claim is legitimate or just marketing bluster.

“There really are no other active fixed income ETFs offering a similar approach,” he said. Davis has taken an institutional approach and made it available for all investors.

Rosenbluth went one step further, noting that in Davis’s narrow universe of actively managed fixed-income ETFs, she may already be the leader.

Just for the record, the term “convexity” in fixed-income, where yields move opposite to price, is a measure of the sensitivity of a bond’s duration to changes in yield, with the term “duration” serving as a gauge of the sensitivity of the price of a bond to changes in interest rates.

Davis rolled out the Quadratic Interest Rate Volatility & Inflation Hedge ETF

back in 2019. That ETF is intended to move in and out of Treasury inflation-protected securities, or TIPS, and over-the-counter fixed-income options in a bid to beat the market. It has about $3.2 billion in assets and has an expense ratio of 0.99%, which means that the fund costs $9.90 in annual fees for every $1,000 invested. BNDD carries the same expense ratio as IVOL.

Similar to IVOL, Quadratic is working with China-based KraneShares for U.S. distribution of BNDD. KraneShares is the ETF arm of Krane Fund Advisors, which is majority-owned by China International Capital Corp.

By comparison, Vanguard’s Total Bond fund charges an expense ratio of 0.04%. However, BND is down 2.2% in the year to date, compared with IVOL and is down 2.3% over the past 12 months, compared with IVOL’s 0.8% gain, not to mention distributions. BNDD only kicked off earlier this week.

Davis said that the important thing to note with her funds is that Quadratic isn’t taking a view on whether the U.S. economy will face a Japan-style era of low economic growth, low inflation and low interest rates, as some buying BNDD might wager.

“Both these fundsare tools…these are Lego building blocks, you can do whatever you want with it or take your own view,” she said, noting that the funds can be paired with investment strategies.

A bet on stock-market bets

Amplify ETFs has launched a fund that aims to offer exposure to the explosion in retail trading. Indeed, more than 10 million new brokerage accounts are estimated to have been opened in the first half of 2021, nearly equaling the total accounts opened last year, according to data from JMP Securities.

The Amplify Digital & Online Trading ETF, ticker BIDS trading on the NYSE Arca, is an index-based ETF that tracks the BlueStar Global E-Brokers and Digital Capital Markets Index. The top five constituents there are Robinhood Markets Inc.
Charles Schwab
Coinbase Global
MarketAxess Holdings
and SoFi Technologies

BIDS expense ratio is 0.59%.

Evergrande-inspired dip buying

The data folks at VandaTrack indicated that purchases of ETFs actually saw a pop on Monday and Tuesday amid the fitful rout in the broader market that saw the Dow Jones Industrial Average, the S&P 500 index and the Nasdaq Composite Index all nose dive. The researchers attributed some $3 billion in purchases of ETFs such as the technology-laden Invesco QQQ Trust and SPDR S&P 500 Trust, to bargain hunting after and apparent conviction that equity markets would soon rebound.

“It took a major sell-off in the S&P to awaken retail investors, but they finally made their presence felt on Monday and Tuesday,” wrote analysts Ben Onatibia and Giacomo Pierantoni at VandaTrack in a note.

VandaTrack and Bloomberg

“In our last note, we argued that retail investors’ appetite to buy the dip was waning. That statement wasn’t completely accurate. They are still more than willing to buy the dip but are demanding larger discounts to deploy their idle cash,” the analysts wrote.

The buying came even amid growing concerns about Evergrande, one of Asia’s biggest property developers and largest issuers of high-yielding junk bonds. The company had borrowed heavily from banks and investors in mainland China, and has had troubles servicing its debts, sparking worries about financial contagion.

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