Under the Hood of the Quadratic Deflation ETF (BNDD)

IIt’s hedging season, according to year-to-date fund flows. One fund in particular has experienced a sharp increase in flows since the beginning of December: the Quadratic Deflation ETF (BNDD).

BNDD has seen inflows of $123.23 million since early December, according to FactSet data, an impressive number considering the fund only launched on September 21, 2021. More and more investors are looking hedges, and the BNDD offers an opportunity to have both asymmetric upside potential and portfolio diversification.

Debt is mounting for many Americans, especially due to the pandemic, with a shrinking population and declining birth rates meaning federal funding costs are being paid by fewer people. Stimulus measures enacted during the pandemic helped avoid the severe economic consequences of the shutdown at the time, but they also caused the federal debt level to exceed 100% of GDP; the current level of indebtedness is that which one sees only in times of war.

BNDD is offered by KFA Funds, a KraneShares company, and is an actively managed, ESG-focused, fixed-income ETF that seeks to benefit from lower growth, narrowing the gap between short and long-term interest rates, deflation and lower or negative long-term interest rates. It invests in US Treasuries as well as options linked to the shape of the curve of US interest rate swaps. Quadratic Capital Management is the fund’s sub-advisor and active manager.

BNDD seeks to hedge against the risk of deflation while creating positive returns when the US yield curve flattens or inverts. It invests in Treasuries of different maturities either directly or via ETFs which invest in Treasuries. The options used by the fund are linked to the US yield curve and include long options, long spreads and butterflies (an options strategy that uses both bearish and bullish spreads) with the aim of limit the fund’s losses.

Options carried within the BNDD are traded on the over-the-counter (OTC) market, which are generally more flexible in their terms but may involve higher counterparty risk. This access to the OTC fixed income securities market is generally not available directly to investors and represents a unique opportunity. By using options, the fund can be leveraged, but BNDD is only open to a maximum options position loss equal to its option premiums, which is only 20% of the fund’s assets. funds.

This fund uses an ESG lens that excludes any stock involved in controversies over extreme events, controversial weapons, violations of the UN Global Compact, civilian firearms, thermal coal mining and tobacco. The fund also falls under impact investing within ESG, as the sub-advisor is a small registered/minority company as well as a majority woman-owned company.

BNDD has an expense ratio of 0.99% and is actively managed.

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