Full Transcript: Nancy Davis on the Inflation Risk Investors Miss

Why Most Investors Are Short Volatility and Don't Know It

Justin: Hi, Nancy. Welcome to Excess Returns.

Nancy: Thanks for having me.

Justin: Very welcome. You are the founder and CIO of Quadratic Capital Management, an investment firm behind two innovative fixed income ETFs, a quadratic in instru, interest rate volatility and inflation hedged, ETF eyeball and the quadratic deflation, ETF, ticker, symbol B and dd.

Today we wanted to have you on to not only talk about your investment process and the strategies behind these ETFs, but also sort of talk about. Investing using options and also some macro related things where these ETFs sort of focus in on including inflation, deflation, the bond market in general, the fed reserve, which is top of mind for a lot of investors.

And just overall talk about how these strategies are constructed and I think importantly, where they fit into one’s investment portfolio and if someone’s sort of investing in these things, how they need to. Need to think about them so our audience can find out more, on your work and the ETFs you could just search the ticker symbol eyeball or BNDD wherever you get your market data or you have your brokerage account. So, hopefully that’s a good setup for the conversation, Nancy. We are looking forward to it, so thank you.

Nancy: Thank you. No, it’s great to be here today.

Justin: Yeah. You spent, almost a decade at Goldman Sachs before founding Quadratic, and you spent a number of years working on their proprietary trading desk, managing, a very large set of volatility, portfolios and strategy.

So I think the first thing, just to get some background on you and, and kind of what you learned there, it’d be. Good to learn about what you actually learned about options and trading and how that shapes the way that you think about markets today.

Nancy: Yeah, so the way that we run, quadratic capital with all long optionality is very much something that I took from growing up, at Goldman Sachs and being on the prop trading desk.

So back when I started at Goldman, it was before the firm had actually iPod. So when we were investing Partners Capital, the really key thing was what can you lose? And I think the whole world right now is selling options, They’re, either hedging and they want the hedges to expire worthless.

‘cause it’s not really, it’s just a hedge or they’re writing options, selling options, and they just want them to expire. So we think a really unique alpha is actually. Using the options as part of the portfolio. And it’s a way of, essentially, think about it like a debit card. Like when you buy an option, you can never lose more than the premium that you spend.

And so it’s a nice way to essentially stop loss at the beginning. So you know your downside and then you have that positive, payout, that positive convexity when the theme, the trade, the macro, the expression, whatever it is, pays off. And that’s really, What I, how I, I expressed all of our views, when I was at Goldman Sachs on the prop desk and I became in 2003 the head of credit derivatives and rate trading.

And I feel like right now, especially in the credit markets, it’s very much like what we were looking at at, in 2001 where a lot of investors are hanging out in short duration credit. Thinking it’s safe and it feels very much like kind of deja vu to me.

Justin: Interesting. We’ll try to unpack that here, in a minute.

‘cause I think that that parallel could be very interesting and timely. But you mentioned, and I want to kind of just make sure we’re defining some of these terms for our audience. So you mentioned this concept of convexity. Can you just sort of explain that, I guess at a high level in terms of like with op options and bonds and what that actually means?

Nancy: So it’s a, it’s a jargon term, that people throw around and it, it’s a term that really comes from the bond market. So it’s a bond convexity, is the sensitivity of a bond to changes in interest rates. Everyone talks about what’s the duration of your portfolio, and I think the thing that we have to keep in mind is that mortgages are, have negative convexity and any type of fixed income instrument that has embedded short optionality, like they call it.

Prepayment risk. It sounds really nice and generic, but it means somebody else’s long. The option, you as the debt owner are short the option, and when you’re short the option, you have a negatively convex profile. And in the option space convexity is kind of the same thing as gamma. It’s just a different, different jargon term depending on which asset class you’re, but it’s like.

Do you use a Kleenex or do you use a tissue? It’s really the same thing. So in option space it means gamma, which is the option sensitivity to the delta change. So how quickly your delta changes. So for instance, an at the money option might have a 50 delta, but then how quickly does that options delta pick up?

Is the gamma sensitivity or the convexity?

Justin: What is the framework that you specifically use for identifying misprice convexity opportunities across these markets?

Nancy: So we focus on interest rate volatility with our, two ETFs, that you mentioned, the eyeball et f it’s not, not eyeball, but eye like inflation, volatility.

I know it always sounds like eyeball. And then the deflation funds. So both of the funds are long interest rate volatility. And you could say like, why do we care? Why should we be long interest rate volatility? Why does it matter? And we created these products directly because we do not think that investors understand what prepayment risk is.

What it means. It means. Someone else’s long the option you are short the option. Therefore, when you’re short options, you’re short volatility and It’s not the vix, it’s not equity vol It’s actually interest rate vol which is embedded in mortgages. And because of the rise of passive investing and indexing mortgages now make up about a third of most people’s bond portfolio.

So, for instance, the Ag index is, used to be the Weiman Ag, then it became the Barclays Ag. Now it’s a Bloomberg Ag, but the ag has it’s considered, core fixed income. It has a 27% allocation to US mortgages and just cour eyes for a second. Homeowners are along the option to prepay. If you own a mortgage, you are short options to homeowners.

And so that’s kind of the thing. We don’t think that bond investors should only be short optionality in their bond portfolio, and that’s why we’re doing these products to give people way of not, if you’re just a passive investor, you’re probably only short ball in your bond portfolio. And we just think, look, put it out there.

Give people choices. Give them access to this market. So. It’s definitely a altruistic and, feel good thing to be really innovating and trying to better, better people’s outcomes.

Justin: Does this, is this what’s related? Is, is this point that you’re talking, is this, what is the parallel to the 2001, 2002 period that you’re seeing?

Is that similar? Am I drawing that right

Nancy: comparison? That was, that’s a separate thing that,

Justin: okay, so

Nancy: that’s more with the credit, kind of Oh, right. Correlating credit curves and vol curves. So that’s. Kind of a different topic, but this is more about just like at the end of the day, if you think about, the AG index is what most 4 0 1 Ks most pension funds like my mom, she’s a retired teacher.

She has, a lot of bonds. She doesn’t realize that her bonds have short optionality inside of it, and it’s mortgages are reset based on, consumers are rational and people prepay. When interest rates go lower and you get, essentially longer duration, right? When you don’t wanna be, that’s kind of, if you read Silicon Valley’s 10 Q, they mis modeled prepayment risk and they got longer duration right at the wrong time.

And that’s because mortgages are, generally negatively convex. And so what we do at Quadratic, everything is positively convex, meaning we’re. It’s treasury obligations. So per our prospectus, 80% of both of our funds are treasuries or cash. And then we have positively convex options coupled with bonds,

Jack: which are treasury.

It’s, it’s interesting, one of the things I’ve learned during the podcast is it seems like a lot of us are short volatility across like all aspects of our lives in many ways. Equities, I mean, it, it seems like you don’t realize that all of us, a lot of the things we just do day to day are sort of a short volatility bet to some degree.

Nancy: Yeah. And then I think the correlation is so important too, because if you have, if you have a portfolio with a bunch of stocks and then you have a portfolio with a bunch of bonds, but all those bonds take corporate credit risks, you kind of have like the same beta, right? You might have a different part of the capital structure, but if you own one company’s stock and the same company’s bonds, you’re kind of exposed to the same stuff.

So it’s so important just to a, think about, Everybody is really kind of naturally short volatility because of this index construction stuff and the move to passive, just not saying it’s bad, it’s just, it’s what it is. You have to understand what it’s doing. But then, yeah, everybody is kind of short volatility in our, in our real life.

And then I think at the end of the day, short inflation, right? Like that, that brings me to my other like, pillar I love to stand on is, I personally think everyone should own the eyeball ETF, That, that’s a broad statement. That’s pretty bold. I’ll explain why. But, we, we live in a real world and everybody, no matter what industry you’re in, what age you are, especially as you get closer to retirement, you have like a limited amount of savings and your goal is to be able to retire and live off the income from your savings and have the same lifestyle.

And people’s big risk is inflation. And everybody, I feel like right now is trying to speculate whether I feel like inflation. People think of it as a trade. They’re trying to think, is inflation going higher or lower? I’m like, it doesn’t, it doesn’t matter what you think because, we all live in a real world, right?

We all have real expenses, real costs, a limited amount of savings. And I think we, as real people. Are actually short inflation in our real life. So that’s why it’s so important to have, I think, especially given that the Fed’s just starting a rate cutting cycle. Assets are at arguably all time highs.

Credit spreads are at all time. Tights and inflation expectations are low. People do not think it’s going to be a problem, and that’s, I wanna kind of grab people and be like, look, this is a really important time in your life to say, what can you do to. Not everything’s gonna make money at the same time.

Right. It’s not a, it’s not a total return strategy. All investing involves risks, but I think it’s so critical that people understand the AG index has, zero zero inflation protected bonds and the Ag. So, no. How can you be core fixed income without any inflation? And only be short optionality.

Jack: Yeah. So I wanna ask you about this idea of managing inflation risk, because what you’re talking about is a little bit of a, a different approach than many people take. I mean, many people will own the gold or their own commodities, or they might own some real estate, or they might own tips. And you’re doing that in part, but you’re doing some other things on top of that.

Can you just talk about how someone would think about this, this method of managing inflation risk versus maybe those conventional methods?

Nancy: Yeah, it, it’s so, I’m so happy you asked that question because it’s like. There’s such group think around inflation. Like the, the facts are, the US Treasury only started issuing inflation protected bonds in the late nineties, right?

In the late nineties is when the inflation protected bond market started, and the only index to reset inflation protected bonds or inflation swaps or breakevens or CPI swaps is one index. It’s one single index called the consumer. Price index, right? Like I wanna grab people and be like, you would never buy one index in your equity portfolio and say, ta-da, I’m done.

I got the stock market. It is crazy that people are using this one index to calculate inflation, especially after hearing. From the Fed for years that they don’t even use the CPI. Like, why would we use the CPI and talk about everybody’s talking about Fed independence. Like what about the bureau labor statistics?

They’re the ones who calculate the CPI and by definition, a third of that index is what they call rent. It’s owner occupied rent in the form of shelter. So it’s just not the only way to think about inflation. And then. Going back, don’t get me started on my, my, standing on my soapbox. But everybody looks at what happened in the seventies, right?

Like, I wanna grab people and be like, the inflation markets did not exist back then. There was no inflation market, there was no interest rate market. There was no interest rate derivatives market. There was even no tips. It started in the late nineties. So, looking at the seventies, especially like things like oil,

I would, close my eyes like, yes, gold has been going up. I’m not, I’m not singing bad about gold. I don’t want hate in this, podcast. I’m just saying gold is a great psychology trade. It’s a great dollar, debasement currency, debasement psychology, a lot of other things, but it’s not necessarily a great inflation trade because it doesn’t pay a coupon.

Right. So right now when you can get, overnight risk-free money from, the Fed at, fed hasn’t cut rates yet to zero, you’re paying, you’re not getting that 4% right now to own gold. And yes, it’s been a great performing asset cost, but I don’t think, would you wanna own oil for the next, like, 40 years to capture inflation?

It’s a, it like agriculture. Perfect example. People would be like, oh, I wanna own food prices. It’s a deflationary thing because of technology. Right? Fertilizers, hydroponics, there are so many things that have made ag not a great inflation hedge because of technology. And I feel like oil is that same thing, whether it’s fracking or looking at, solar, other sources of energy.

It’s just like. It just drives me crazy. ‘cause people look at the seventies and they do all their back testing and I’m like, you’re missing the whole obvious market, which is the inflation markets, which are newer and tips are not a great product on their own. And that’s why we created eyeball. We take tips and we try to fix the issues inside of tips with the options.

Jack: To your point about gold, I mean, if you look historic, and this is something I’ve researched a lot more recently, like gold is not the greatest inflation hedge. I mean, sometimes it’s an inflation hedge, then sometimes it’s not an inflation hedge. So if you’re looking for something that’s a consistent inflation hedge, and like you said, it’s hard to bad mouth gold right now ‘cause it’s on fire.

But, but it hasn’t been that consistent throughout history. Yeah, I mean do, have you found that too? It’s not, it’s not that consistent throughout history in terms of being an inflation hedge?

Nancy: Yeah, we actually wrote a, a white paper on it, so if anyone wants it, we’d be happy to send it. And it’s not.

It’s not saying gold’s a bad investment, not saying you shouldn’t own it, it’s just saying if you own it for inflation, you might wanna think about other things that you can also use to capture inflation.

Jack: Since we’ve been talking about inflation, I wanna ask you about inflation. ‘cause, and your take on it overall, because we’re sitting, I guess around 3%, with inflation right now, we’re not, I mean, we’re not spiking a lot, but we’re also not going back to the fed’s target.

I’m just wondering what, what your take is overall, or if you have one, on where we are with inflation right now.

Nancy: Real yields have not been this high in a very long time. The break even rate, which looks at where implied CPI is expected to be. So right now the five year break even is 2.32, the 10 year break even 2.27.

So I’d say the markets are priced to be right around that 2% inflation long-term target. And to me, I think that’s a buying opportunity because there’s no. 2% is just a made up number, right? It’s, it’s not, not a like why 2%? Why is that a real number? But that’s where inflation markets are saying CPI is gonna be.

And then I think a really simple way of getting inflation expectations outside of CPI is using the yield curve. And that’s what we do inside of the eyeball. ETF, is we essentially own. Call options. They’re not called call options. It’s a different jargon term, but it’s basically to express a steeper yield curve, which to me is a really nice other index to measure inflation expectations because that’s where the rest of the world lends money in dollars.

Right? The, the Fed sets the policy rate, they set the overnight rate, but the rest of the world dictates the cost of. Owning, US dollar denominated duration. And the yield curve right now is very, very flat. We own, there’s a lot of different yield curves depending on which rates you’re looking at.

A lot of people focus just on the treasury curve, but what we look at is the, the difference between two swap rates. So we use the SOR rates, and right now that rate is the twos. 10 SOFR spot curve is 28 basis points. Two eight. So it’s very, very cheap from a historical average, and we’re coming out of a period of extreme re long and low yield curve inversions.

So in 22, the Fed, remember they, they went from, we’re not even thinking about, thinking about raising rates to the fastest hiking cycle, even more so than voler. And that caused the yield curve to invert and stay inverted for three years. It’s just now starting to come out of inversion and it’s again, the two 10 spot.

So FR curve at 28 basis points, like on average, when that yield curve starts to go, through the. The unin inverted to positively slope line. It doesn’t, it doesn’t, it goes up quite a bit. We did some historical research that we’re happy to share with, your audience on looking at, other periods of after the yield curve, uninverted It can go as high as, historically, 300 basis points. And it’s at 28 right now, under 30. So it’s, on average it’s around a hundred basis points, which makes sense. For instance, Jack, if, if Justin was to say, Hey, could I borrow $10,000 from you? Right? And he said, I’ll pay you back in a year.

And you said, okay, I’ll give you, whatever his credit risk is, and you say, okay, I’ll give you loan for, what would be your interest rate? Just curious. He wanted borrow 10,000 bucks for, oh, I was letting

Jack: Jack borrow the money. I mean, Justin’s a dicey credit risk too, so I gotta, I gotta take that into account.

Nancy: Okay. So. Whatever, whatever your spread is, then turn around and he says, he says, actually, instead of one year, can you loan me that money for 10 years? Would you charge him more or less than your one year rate?

Jack: You’re gonna demand a significantly higher rate for that.

Nancy: Yeah. And that’s, the market is not pricing that right now.

And that’s what’s so crazy is the US has one of the lowest level of yield curves in the whole world, like. Other markets, even, even Japan’s two 10 yield curve is, is steeper than ours right now. So it’s, it’s really exciting time because eyeball, I think is just the yield curve, just un inverted in 2025, and it’s just starting to kind of normalize.

And on average, if you look at the, the swaps, 2 cent swaps curve, it’s typically around a hundred basis points. It’s, it’s exciting ‘cause there are not many things out there in the financial markets that are trading at, kind of low valuations, right? There’s not much stuff out there that you’re like, oh, that’s not at historical highs.

And this is one of those things. And it’s also inflation expectations outside of just the consumer price index.

Jack: So do you, do you have views on inflation personally? Like, do, do you think inflation might be, like the risks might be to the upside with it, or, is these not really necessary for what you do?

Nancy: Yeah, I, I personally think people should have some allocation to inflation in their portfolio. Like I just think, everybody at the end of the day needs to, and it’s, it’s kind of an orphan asset cost in the United States because the AG index has no inflation protected bonds. So it creates tracking risk in these portfolios.

So most people don’t have inflation protected assets on their own, ‘cause it’s not in the indices. To me, I, I think it’s just like a important part of a diversified portfolio is like, what if like, just close your eyes for a second, right? The fed is probably going to be cutting rates, probably cutting rates pretty aggressively.

It’s, should they do that? Is that, can you put the inflation genie back in the bottle and inflation expectations? Are not expensively priced, they’re not at historical highs and interest rate volatility. Don’t even get me started on that. That is, that to me is like a backup.

The truck really, really attractive. Very, very low historical levels and, if you look at like Silicon Valley Bank, which was not that long ago, that was 2023. Interest rate vol is down about 40%. Since Silicon Valley Bank and like literally nothing has changed.

If anything, it’s gotten worse. All the, all the issues that are out there, it’s, it’s just, it’s a very attractive time, meaning the price of convexity positive convexity, the price of that asymmetric payoff given the price of implied volatility is very low. It means you can buy for the same, dollar premium you spend, you can buy a lot more options.

For that with the cost of implied ball. ‘cause implied ball, like whenever you talk about options markets, if you buy an option, you’re always, long volatility. If you sell an option, you’re always short volatility and the price of volatility dictates how expensive that option is to buy or sell. And so right now interest rate volatility is very, very low in my opinion.

It’s kind of a, our type of interest rate vol is trading around three basis points a day. Which, think about how much, just on nothing, markets can really move. And so I think it’s a, a really unique opportunity.

Jack: Yeah. I didn’t realize actually the move had come down that much because I, I remember like back in 2022, everybody was talking about the move was going crazy and the VIX was not responding.

And a lot of people were talking about that divergence and whether it meant anything.

Nancy: Yeah. And, and the move is just one. Index that looks at, 30 day options. So what we own in eyeball is a lot longer dated options. And the, the vol curve is what you call backwardated, meaning it’s downward sloping.

So the cost of owning longer dated options is ze even cheaper than the shorter dated options. So like, it’s a, so it’s a pretty cool thing to have a Backwardated V curve. ‘cause like, think about it, most of the time, the future is. More unknown than the present. So typically you would have a vol curve be upward sloping, meaning the cost of volatility is higher in the future, not lower.

And so that’s a, a really unique thing about the, our type of market that we access inside of, the eyeball ETF.

Jack: I’m just curious, as an aside, have you looked at anything about the relationship between bond volatility and stock volatility? Does it mean? ‘cause people were talking about that all the time in 2022, that bond volatility went crazy and stock volatility should follow.

Like is there any relationship between them at all?

Nancy: I mean, generally correlations can go up at any point. Right. And I think that’s the, the big risk to all portfolios is kind of especially a 60 40 portfolio, would be the stagflation risk, which is when stocks and bonds, there’s no guarantee that they’re negatively correlated.

In fact, they could be positively correlated. So. I think that’s just one thing that, you always have to be thinking about. It’s not just volatility and I think, again, most people are always focused on equity ball and I wanna grab people and be like, that doesn’t really, it’s not, you’re not naturally short equity ball, but you’re naturally short fixed income ball because of the allocations to mortgages and prepayment risk inside of a lot of these.

Structured credit, like the search for yield, has pushed people into a lot of instruments that take credit spread risk. And a lot of these credit products have prepayment risk, which means somebody else’s long the option, not you. And when you’re short options, you’re short that that negative convexity, that short optionality, that short volatility

Jack: and, and to your point in, in 2022.

Long equity vol didn’t help you that much, but long bond volatility did help you. So I guess with these inflation surprises that that might be a better protection.

Nancy: It’s just something different. Like I think, I hate the word protection ‘cause I’m like all investing involves risk and there’s nothing, there’s no free lunch.

Right. But I think that’s a point, the goal for investors is just to have a diversified portfolio and to understand and not have things be too correlated with each other. And so I think our funds are not. Nothing to do with equities. They’re not long equity ball, they’re long interest rate ball. They’re, 80% of the fund is treasuries and cash.

So it’s not taking, credit spread risk like, some of the other products out there, like CLOs take credit spread risk, right? With lending money to corporates and loans. So it’s just something else, which I think is, Is good because a lot of people have, a lot of correlation between their stock and bond portfolios right.

Now.

Jack: How would someone think about, like, we’re not gonna give, we don’t give advice here, obviously, but if someone thinks about this, like in a portfolio context, how they would use something like this, how, how would you think about that?

Nancy: So again, I’m not a financial advisor and I don’t, not my area of expertise, but I can tell you from talking to our clients, a lot of our clients use it as a compliment to the AG index.

So they’ll say. All right. We have our whatever, 60, 40, whatever it looks like, plus or minus a little bit, and they say what we allocate to the ag. We know that the ag, a third of it approximately is mortgages, so they’ll allocate about a third of their bond portfolio into eyeball, depending on how much they want to reduce that embedded short volatility exposure, and also to add inflation protected bonds because there’s no, no tips inside the ag.

And it’s only short vol, so most people just use it as a compliment to what they already have to make it. I think about people, people have the ag ‘cause it says core fixed income, but how can you be core fixed income if you don’t have any inflation protection? Especially in this environment and your only short optionality,

Jack: it’s just an aside.

But I’m curious ‘cause you, you obviously have a detailed knowledge of what’s going on by behind the scenes in the bond market. Mm-hmm. And we’ve talked a lot about the national debt on the podcast, and I’m just wondering, do you have any views on that, like in terms of its impact on the bond market long term?

Nancy: I mean, look, people have been screaming about the debt and I remember seeing that counter in, New York City about it. Like, yeah, I remember that. The world is, is awash in debt. And I think it’s a, I wouldn’t say it’s a, it’s not going away anytime soon. I do think, the, I do think interest rate ball is a pretty good and attractive asset cost to own because we don’t really know what’s going to happen.

And I think when you, you can buy something that is a downward sloping ball curve that is treating at. Relatively historically low levels that you kind of naturally have short anyway, I think is a really nice, just diversifier.

Jack: Can you talk about the other fund, BNDD? We’ve talked a lot about eyeball.

What, what is your thought process in terms of how you construct that?

Nancy: So that is nominal treasuries, meaning not inflation protected treasuries. So we use really long dated nominal, nominal treasuries inside that fund. And that’s. For people who think the Fed is not going to cut rates at all and that 30 year yields are gonna go lower, meaning bond prices higher, that’s a fund for you.

It’s a way, I’d say it’s like, it’s more like espresso to coffee. So it’s, super long duration nominal treasuries, plus a kicker of, either the Fed not cutting. Or 30 year yields moving lower bond prices higher. So it’s like a turbocharged, it’s like espresso beans.

Jack: And is, are they, are they mutually exclusive?

I mean, do you, do you typically see people using one or the other, or, or is there, is there a case that both would be, would work like inside of a portfolio?

Nancy: Yeah. Most people have, treasuries and then they also have inflation protected treasuries. So it’s not like a one or the other people. People don’t pick a side.

Most people have. Nominal treasuries and no inflation protected treasuries. So I’d say, that’s why I’m kind of push eyeball more because most people naturally have some allocation to regular treasuries, but they don’t have the allocation to inflation protected treasuries. And that’s just because in the United States, inflation protected bonds, it’s kind of an orphan asset cost.

It just doesn’t exist. Whereas in other countries, like the UK for instance. Their pension funds have what they call linkers in their benchmark. So they have to by mandate own inflation protected bonds. Here, that’s not the case. People just don’t care. And that’s why I think it’s kind of such a thing that I wanna stand on my soapbox and be like, when, when everybody’s like ignoring an asset cost and it’s really cheaply priced, meaning like.

We don’t know whether the fed cutting rates or not cutting rates or whatever is going to happen to me. That’s like, something that you wanna own. So

Jack: it’s interesting to your point, like as a financial advisor, I see a lot of people’s portfolios when they come in and I, I almost never see tips Yeah.

In a portfolio. So they are, they’re widely underused, relative to their value, I think.

Nancy: And tips are not great on their own because all tips used is the consumer price index. And so it’s not saying it’s a. It just needs tweaks and, and tips are naturally all long duration. So it’s like if you wanna own inflation protected bonds, why would you wanna own duration?

And so a lot of people’s solution to that is, okay, we will buy short dated tips. Well break evens. Like if you pull up the one or two year break even in 2008. There’s no zero bound, like it can go massively negative. The, the one year, two year break even, it went down to negative six. So there’s no zero in the interest rate in inflation markets and short dated tips don’t have the duration.

But you’re also making more of a realized bet on the Bureau of Labor Statistics. Right? It’s like where do they calculate that CPI number? Like I don’t, I don’t want that, I’d much rather have. A longer dated tip, but to have a way to actually profit from when duration sells off instead of hedging it.

We can actually do well when duration sells off. Like if you look at the first quarter of 2021, I’ve always, I’m doing this off the top of my head, so this might not be right, but 311 basis points when tips alone, and we had about 85% in tips Were down. About 150 basis points. So because of that, that positive convexity, when the duration sells off, here’s a way, instead of hedging your duration, here’s a way to actually profit from rising inflation expectations, especially when the fed’s gonna be cutting rates, whether inflation’s a problem or not.

Right.

Justin: I’ll leave that there, but no, and I think what’s great about this is, this, you’ve, you, you’ve brought these strategies into. A transparent ETF wrapper cost effective. And I know with eyeball at least it’s, north of 400 million in assets. So clearly the, the market is, is starting to pay attention to this and, and, you’re growing nicely and I think conversations like this can help investors understand where something like this fits inside.

A portfolio. So this has been great, Nancy. We have, two standard closing questions. We like to ask all of our guests so you can go anywhere you want with it. But the first one is, what is one thing you believe about investing that most of your peers would disagree with you on?

Nancy: So I think most of the world are option sellers and I think I’m like, I’m this weird, kind of magic rainbow unicorn in the world of investing because like.

99% of people, all they wanna do is sell options. And to me, they all have it wrong because people take their portfolio, their core, like linear Delta portfolio. So stocks, bonds, things that go up a dollar, down a dollar, and then the options are around the periphery. For me, the options are the investments, they are the portfolio.

So I would say that’s like totally opposite. Opposite day compared to. The way, and, and to Jack’s point, I think most people are short volatility and they just don’t, they just don’t know it, it’s like hidden inside these QIPs.

Justin: And the last question, just real quick is based on your experience in the markets, what’s the one lesson you would teach your average investor?

Nancy: Oh gosh. Selling selling options is not income, it’s selling options. It’s not SEC yield. It’s not income, in my opinion, it’s just, I, I wanna grab people and be like, look, you’re taking something. Like, like there are a lot of strategies, and I’m not saying it’s a bad strategy, I just don’t think it’s income.

I think it’s just selling options, right? So that’s, the one thing I think people don’t really understand and, and you, you talk to people who are trading like zero day options and they’re, they call it, they’re like, oh, we write options all the time. That can be, that can be dangerous. ‘cause especially you sell an option, the most you can make is a little bit, the most you make is that trade right.

You just want it to expire worthless. And I don’t think people really understand that. You can have, you can lose a lot more than you’re, then you’re collecting, you can lose. It’s super negative convexity. So I, I just wanna be, I feel like the world has gone a little crazy with. The use of, derivatives have a really bad reputation for a good reason.

So I think when you buy an option, you can lose it all. Like, I’m not saying you can’t lose money, but you can only lose what you spend. Right? It’s kind of like a debit card. When you sell an option, you collect a little bit and you can lose a lot more E even like people who say, oh, it’s covered.

Well, you, you. Or selling away the upside in that equity or that stock or whatever you have. And there can be tax implications from that as well. So there’s no free lunch. That’s what I’d say. All investing, all of it involves risks.

Justin: Thank you very much, Nancy. We’ve enjoyed the conversation and we wish you the best with, the ETFs and we look forward to following your success.

Nancy: Thank you. Thanks for having me on as your guest. I really appreciate it.