Inflation Hedge

The Quadratic Interest Rate Volatility and Inflation Hedge Quadratic Interest Rate Volatility & Inflation Hedge ETF (IVOL), launched in May 2019, uses Treasury inflation-protected securities, or TIPS, and interest-rate derivatives to hedge against inflation and fixed-income volatility. Even newer is the Horizon Kinetics Inflation Beneficiaries ETF (INFL), just launched in January, which concentrates on stocks the managers think will benefit from inflation.

IVOL, to use its ticker instead of its jaw-breaking official name, is headed by Nancy Davis, who was among Barron’s 100 Most Influential Women in U.S. Finance in 2020. She founded Quadratic Capital in 2013 after stints at Goldman Sachs and AllianceBernstein.

While many investors aim to hedge inflation with commodities, stocks, or real assets, most look first at TIPS. The main problem with those inflation-indexed securities is their long duration, which means they are especially prone to lower prices when their yields rise, Davis says. So IVOL adds fixed-income options to counter that duration risk, specifically ones based on the Treasury yield curve (in this case, the difference between the two- and 10-year notes).

So far, the results have been positive, with IVOL posting a 12-month return of 18.17%, including 2.81% so far in 2021, while the bond market has sold off. Last year’s performance included a positive return during March’s meltdown, she points out. By comparison, the iShares TIPS Bond ETF (TIP) returned a much lower 7.62% over the past 12 months and minus 0.94% year to date.

INFL, managed by Horizon Kinetics, an independent, New York-based outfit established in 1994, eschews TIPS and commodity futures in favor of equities that should benefit from inflation while generating superior returns over the entire economic cycle.

The fund emphasizes companies that are capital-light with exposure to hard assets, the portfolio manager, James Davolos, explains. For instance, Franco-Nevada (FNV), one of its holdings, owns a portfolio of royalties rather than gold mines. Since gold’s previous peak of $1,891.90 an ounce on Aug. 22, 2011, the yellow metal is down 6.2%, while the VanEck Vectors Gold Miners ETF (GDX) returned negative 48.1%. By contrast, Franco-Nevada returned 157% over that span, according to FactSet data. Davolos also sees exchanges such as CME Group (CME) as beneficiaries of rising inflation.