Nancy Davis

And so what made you kind of make that leap? what from I'm sure, everybody in our world would love to have that job at Goldman, right? And so you were there for 10 years. What made you kind of go that entrepreneurial route?

I think it is the American dream. I always just kind of wanted to start my own firm. And just, sometimes you never know, like so many firms start and they don't make it. So I think I would definitely encourage all entrepreneurs out there to just go for it, right? Sort of like you only live once. And it's been just the most amazing experience. But a lot of the things that you do when you start a firm, you've never done before in your life, so it's a huge learning opportunity. And also kind of knowing when something's not working and when to stop doing it, like how to pivot.

Yeah, sometimes those are the hardest decisions to make. Because, you come up with a good idea, and then it's hard to kind of pivot and move. But you guys have had a lot of success. And we'll talk about the success of particularly Ivol here later in the show. But before we, get too into business, I always like to ask any hobbies, what do you like to do when you're not behind the desk?

Well, I'm a big sailor. So it's not a it's a very negative carry, high tail risk strategy, kind of hobby to have. But I did it growing up and just love it. How about you, Bradley? What's your what's your flavor?

Well, right now, I'm a taxi driver for soccer practice. It's mostly what I've been spending my time on. But if I get out on the golf course, that's mainly what and it's funny, I don't know what it is about ETF issuers or finance, but you're probably the sixth person on the show that has been a sailor. Oh, you I know, Katie Stockton's a big sailor. I forget who else I talked to that's really into boating, but must be popular with with the ETF space. So yeah, definitely.

It's a very serene, it's quiet, right? Some people with motorboating is kind of so different because you go, you go more to like a destination, but it's loud. Sailing is just really chill. It's very quiet.

I've never tried it. It looks fun. It's probably something that has a major learning curve doesn't look like it's something that's super easy to do.

So not about it's about the journey, not the destination because you don't really go very far or very fast.

Yeah, I can see I don't I don't know if I'd want to go too fast in one of those things. But let's talk about quadratic capital kind of holistically. You mentioned some PIP. So did the firm start out to be an ETF issuer? Are there other things that you guys do for clients like holistically? Can you talk about the firm?

Yeah, so so we're a RIA. And initially, when we started, we were managing separate accounts. And then we started a hedge fund as well. And then we got into ETFs. And really, 2018 is kind of when I really was like looking to have a better, you always hear about the tax efficiencies of ETFs. And I was just like curious and wanted to learn more about the ETF wrapper and kind of how to use it. I almost saw it as like a as a thin technology. And then it was just like, wow, this is just such a great package to use.

Well, yeah, let's talk. Let's let's talk about Ivol right now. It's your interest rate volatility and inflation hedge ETF. So like at a very high level, let's just talk about what that fund's trying to accomplish. And then we'll dive a little bit deeper into it.

Yeah, so it's trying to fix some of the problems and be more of a solution for investors to the ag index on its own. A lot of people have the ag because they want, they're not trying to take a view on the Fed or where interest rates are going to go. They just want core fixed income exposure. And the big problem with the ag is that over a quarter of it is mortgages, which are short optionality, as we just talked about. And then there's no inflation at all inside the ag. There's no inflation predicted bonds. There's no exposure to the rate market. So we just thought this would be a good a good way for investors to access the rates market.

So would you hold this kind of a... Because my next question was kind of about the ag exposure. And same goes for tips. So like, is this going to encompass kind of broad exposure to both of those in a way, right? Like you'll get the inflation protection. You'll get the interest rate. Like, can you talk about why someone would want to use iVol as either a replacement or kind of a supplement to those two? Because ag and tips, those two ETFs, AGG and TIPS are like really heavily used. So can you just kind of talk about why someone would want to look at iVol as either a substitute or a complement to the both of those? Yeah.

So we see it more as like a completion portfolio to the ag. So the ag has no tips inside of it. And then it only has, short optionality through the mortgages, which is about 26%. So a lot of people take their core holding the ag and then they add iVol on top of it. So iVol is 80% of the fund is tips, which are, type of treasury bond. They're treasury inflation protected securities. But the two problems that you have with tips by themselves is number one, the only index used to reset inflation inside of tips is the consumer price index.

So let's talk about how this portfolio is constructed while we're on that. So we understand how, ag and tip are constructed. Like, so how are you constructing iVol? What could people, what are people finding in as kind of general holdings inside the portfolio?

So the fund is, is pretty different because it accesses the rates market. Most investors can't do that on their own because it is a over the counter market. I like to compare it to mortgages prior to mortgages getting Q-sipped before the savings and loan crisis, the whole mortgage market was OTC. So I see us Q-sipping the rates market by giving access to interest rates. tips are a pretty new market. It's just important for people to understand the treasury only started issuing inflation protected bonds in the late 90s. Um, the only index is CPI and a lot of people just say, okay, here's our core holding in the ag and we're going to add, um, iVol on top of that to add exposure to tips and also

So correlation, I was looking at your correlation matrix. It's extremely attractive. So if you're sitting down with, a portfolio manager that has an already diversified portfolio, like where are you recommending iVol gets a seat? it could, you could do it in a handful of different ways. I've just was wondering like, what is the best utilization of iVol in your opinion?

So, um, it usually sits in the fixed income side of the portfolio. A lot of people use it as a completion portfolio to the ag. So they'll take whatever they have exposed to the ag and they'll say, okay, maybe simple math, like 26% of the ag is mortgages. Mortgages are short options to homeowners. So we'll take, 26% and add iVol to help reduce that short volatility exposure in our bond portfolio and also add inflation and inflation expectations outside of CPI. Um, the people who have iVol as a larger weight and their fixed income portfolio are usually the ones who are pretty bearish on credit.

See, and you, you walked me right into my next question. So iVol, you would want to, I'm assuming that in periods of equity risk off or the, the potential for equity risk off, you're going to be one of increasing your exposure to iVol. Is that correct? Yeah, it kind of depends.

So iVol doesn't have anything to do with equities, um, inside of it, but it is long interest rate volatility. So volatility, when, when markets become stressed, volatility tends to increase and we don't have the VIX that actually, I'm very proud to say we have very, very low correlation to the VIX or not correlated at all, but it's another type of, in a risk off environment, we can benefit from the Fed cutting rates more than what's already expected in the market. So kind of like March, 2020, we had positive performance in March, 2020 when tips alone were down. And that's because we can benefit from either Fed cuts or from rising interest rate volatility because we, we own options.

Yeah. it's the products extremely unique. It's probably why you've had so much success in raising capital in it. And it feels very institutional quality in nature, right? A lot of the ETF plays are, as kind of in this space, like an indexy and this, this has some flavor to it. Um, with that under, with that underlying, um, exposure, like how often are you reconstituting that portfolio? Are you on, a weekly or monthly cadence? Is it active annual? Like how often are you making changes inside the holdings of the ETF?

Yeah. So we, we are an actively managed ETF, so we can make changes whenever we're fiduciaries for our shareholders. So whenever we think it's appropriate, I think, um, we tend to trade, we tend to take profits more when the options are making money and working. Like for instance, Silicon Valley bank week, um, I've always up 16% in, a couple of days. Um, we did take profits. Like in hindsight, I wish we took more profits, um, off the table, but we tend to profit take more when, because we're long options, the amount we can lose is defined on the options piece to the premium that we have at risk, the premium that we pay.

Yeah. So is this, is I've also, um, can you use as an income play as well? Do you guys have, um, um, a month or do you have a distribution cadence? Is there yield in the portfolio?

Yeah. So, um, the sec is pretty particular about the word yield. Um, so we talk about like the 30 day sec yield, which you can see on the website. Um, we have paid a 30 basis point monthly distribution for over five years. So sometimes tip CTFs, if you look at, various tips, CTFs, they don't pay distributions at certain periods of time. We have, for over five years, every month paid at least 30 basis points. Um, so it's, um, it's something to look at if you're looking for monthly distributions, but I, I try to be careful about the word yield and income because it's not, it's a distribution and it's really a question of how that distribution gets taxed at the end of the year too.

Well, like I, like I alluded to, five minutes ago, the institutional feel of this product and what you guys are doing is, is definitely a level above. It probably goes back to, your time at Goldman and also your, your time running funds. So, or a hedge fund, but yeah, it feels very well thought out and, and very institutional. If it's okay with you, I want to flip over to BNDD. Yeah. Which is your deflation ETF. Same question as I've all, what is this ETF trying to accomplish holistically kind of a big picture?

So a lot of people to get, so BNDD is nominal treasuries. It's long duration, uh, very long duration nominal treasuries, whereas I've all uses inflation protected treasuries. So that's real yields versus BNDD is it's sort of like people would own, TLT and TIP, right? They're not, they're not opposite. They're just different exposures to the treasury market. Our big issue is, we're not big fans of linear derivatives. So anything like a linear derivative is a future, a forward, a swap. It goes up a dollar, down a dollar. I like to think of it as almost like a credit card exposure because you're not really paying for it.

Yeah. So I think you just answered this. So what, what environment, well, let me ask it a different way. So is there a certain environment you want to own BNDD? And also is that the flip side, the other environment or the opposite of that environment where you'd want to own Ivol? Are they complimentary in any way?

Yeah, it's not one or the other. I know inflation and deflation sound kind of like they're mirror images of each other. They do different things. Um, somebody could be, the biggest, like, say you have a ton of mag seven tech stocks, you're, super bold up in that space. You might want to have Ivol there just in case, we have, uh, more inflationary pressures. Right. So just because you have, not everybody has like one view in a portfolio, the whole point of like the art of, portfolio diversification and asset allocation is to not have, everything go up and down together all at once.

Yeah, thanks. That was super helpful. Staying on BNDD, how is this portfolio constructed? Like what are the holdings that you're going to generally find that are going to be different than Ivol?

Yeah, so it is different because it's still treasury bonds. So 80% of both funds are treasury bonds. But we use different types of treasuries. Ivol is inflation protected treasuries, sometimes called TIPS. And then BNDD is long term nominal treasuries. So new reset to inflation. It's a really, really long end. So it's like super, super duration. So it's BND deflation or super extra long duration.

So we talked about this with Ivol. But again, you said you're not a financial advisor, but you know how portfolio management works. Are you slotting BNDD in again in your fixed income sleeve? Is this where you're putting it?

That's what I, again, I'm not a financial advisor and I don't construct client portfolios. I just manage the, I'm the PM for both of these funds. And so I think the trick is always like, where does it go? It does go in fixed income. How do you use it? How do you size it? Those are always kind of the tricky questions. Once you get past the appropriateness, that fund, it kind of depends like how much duration people want. But I'd say with Ivol, I think you're going to have a larger allocation, in my opinion, because inflation expectations are so low and it's not in the ag, whereas the ag, a big component of it is treasury. So you just have to be careful that you're not taking too much treasury duration.

Got it. Well, Nancy, I thank you very much for explaining all of this to me. It's definitely complex. And looking at it, it definitely, you guys have had a ton of success in Ivol. That fund, if you've only launched it in 2018, has done very well in terms of gathering assets and it's had some very good years. So congratulations on that. Before I let you go, though, where can people learn more about both of these funds? Where can people learn more about you and Quadratic Capital?

Well, both funds have a website. Right. So it's either Ivoletf.com or BNDdetf.com. Or you can also look at the KFA page to get more information on the funds. And I think, we do try to it is different. Right. It is something it's not like another, another fund that's doing the same old stocks or, cutting up an index. So it's something truly different. And it definitely takes, I think, more intellectual curiosity and more time to learn about it and see if it's something appropriate. But we try to do our best with our materials to really describe, in a symmetric way what the risks are and what the potential rewards are.

Yeah, I was actually on the website. There's some white papers on there as well as some presentations on there. I think people, after listening to this, should take the time to check out because it does walk you through kind of in a very systematic way, like who you are, what the product is, where it works, where it might not work, and what environments it is favorable. And kind of, so you guys have done a really good job, I think, in terms of investor education on what can be, a more complex area that I would say most finance people are focused on equities or just fixed income as a whole, where this is, diving more into, interest rates and other things, which I think confuses people sometimes.