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The Macro Tourist Details His ‘Dream ETF Position’
Read more from The Macro Tourist
Is it finally here? Has the latest round of poor ISM economic releases unleashed the long awaited it’s-too-obvious-to-ignore slowdown the bond bulls were pining for?
The market certainly thinks so. Have a look at the US 2-10 yield curve spread:
In late September we were threatening inversion, but the last couple of poor ISM economic releases has steepened the yield curve by almost 15 basis points. That’s not crazy by any means, but it signals the mark
If you own just IVOL, seems like a curve steepening is likely to decrease the value of SCHP. Hard to bet on a curve steepening in which a 7 year duration doesn’t produce a loss. Will that cancel out some or most of the return on the spread options?
Further, the 99 bp fee for IVOL is pretty high for a bond ETF, especially considering 85% of holdings is SCHP which doesn’t require active (any?) management by the IVOL manager. One could argue you’re paying >600 bp for active management of the 15% of holding that is the options.
Why isn’t IVOL simply the spread options? Other than that it would be hard for the manager to make money (today the options represent <$10MM AUM).