. Both funds are positive for the year, and delivering better returns for investors than the S&P 500 is.
Davis says investors need to count on more volatility ahead as expectations for inflation and interest rates change rapidly. "Less than a week ago we had 100 basis points of hikes priced in, and now the hikes are coming out of the market," she told Insider in a recent interview."Future inflation expectations are very cheap. Interest rate volatility is something most people are short on in their portfolios."
She explained that buying a typical bond index like the Barclays Aggregate Bond Index involves taking a bet against volatility, because lenders are committed to holding mortgage securities while homeowners hold the option to pay off their mortgages at any time. In other words, Davis is suggesting that if investors don't specifically look for exposure to interest rate volatility, the natural tilt of their fixed income portfolios will mean they are betting against it. That will be a problem if rate volatility remains elevated, as she expects it to be. Her firm's IVOL ETF gives investors exposure to interest rate volatility, and they can also use options to bet on it.
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