Short-term Treasury yields rose at the end of June, benefiting several bond ETF strategies. The Quadratic Deflation ETF (BNDD ) ended the month and first half on a strong note and is well-positioned for slowing growth.
BNDD is a fixed income, ESG-focused, actively managed ETF. KFA Funds, a KraneShares company, subadvises the fund. The fund ended the month with a 4.43% rise in price in June according to Y-Charts data. The fund ended the first half up 8.07% by price and was up 8.61% on a total returns basis as of 06/29/2023.
A Bond ETF to Benefit When Short-Term Rates Rise
The fund seeks to benefit from lower growth and a reduction in the spread between short- and long-term interest rates. It also benefits from deflation and lower or negative long-term interest rates. According to KFA, the fund’s strategy profits when yields are declining on the 30-year Treasury or when short-term rates are rising.
BNDD seeks to hedge against deflation risk while creating positive returns at times when the U.S. interest rate curve flattens or inverts. It invests in long-duration Treasuries with different maturities either directly or via ETFs that invest in Treasuries.
BNDD remains a top-performing bond ETF in June and YTD. The fund was one of the top 5 performing bond ETFs in the last four weeks, up 3.97% in returns according to FactSet data. BNDD is also the sixth top-performing bond ETF YTD. It crossed above its 50-day Simple Moving Average on June 7 and has held above it ever since. The ETF remains below its 200-day SMA but continued to trend upwards for much of June, making it a fund of note going into the second half.
The fund uses options tied to the U.S. interest rate curve and traded on the OTC market. These include long options, long spreads, and butterflies (an options strategy that uses both bear and bull spreads). All options utilized attempt to limit loss by the fund and enhance returns.
BNDD carries an expense ratio of 0.96% with fee waivers that expire on August 1, 2023.
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