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Bets on Higher Rates Trigger Rally in Inverse Treasury ETFs
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The U.S. Treasury yields have been on a surge lately, driven by expectations that the Fed will keep interest rates higher for longer to fight inflation and downgrade of the U.S. credit rating by Fitch Ratings. The 10-year yields surged to 4.28%, the highest level since June 2008.
This has raised the appeal for ETFs that bet against U.S. Treasury bonds. Some of the popular ones that target the long-end of the yield curve include ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report) , Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) , ProShares Short 20+ Year Treasury (TBF - Free Report) , ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report) and ProShares UltraShort 7-10 Year Treasury (PST - Free Report) .
Inverse ETFs provide opposite exposure that is a multiple (-1X, -2X or -3X) of the performance of the underlying index using various investment strategies, such as swaps, futures contracts and other derivative instruments. These ETFs could be worth buying for huge gains in a short span arising from rising yields.
The latest minutes from the Fed's July meeting showed that “most” policymakers continued to prioritize the battle against inflation, while “some participants” cited risks to the economy from pushing rates too far. The latest data on retail sales also stoked fears of continued higher interest rates. U.S. retail sales came in better than expected, rising 0.7% in July (read: ETF Areas & Stocks to Win on Upbeat July Retail Sales).
Additionally, inflation in the United States rose for the first time in July after 12 straight months of decline. The Consumer Price Index rose 3.2% year over year, up from an increase of 3% in June, which was the lowest in over two years. Although inflation has dropped from a peak of 9.1%, it is still significantly above the Federal Reserve's 2% target.
Meanwhile, Fitch Ratings downgraded the U.S. credit rating to AA+ from AAA, citing “expected fiscal deterioration over the next three years,” an erosion of governance and a growing general debt burden. This has pushed U.S yields higher.
ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report)
ProShares UltraShort 20+ Year Treasury ETF seeks two times the inverse daily performance of the ICE U.S. Treasury 20+ Year Bond Index. It is the most popular and liquid ETF in the inverse Treasury space, with AUM of $492.1 million and an average daily volume of 2.7 million shares. ProShares UltraShort 20+ Year Treasury ETF charges 89 bps in annual fees.
Direxion Daily 20+ Year Treasury Bear 3x Shares offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $321.1 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 309,000 shares a day on average (read: Rates to Remain Higher for Longer? ETFs to Benefit).
ProShares Short 20+ Year Treasury ETF (TBF - Free Report)
ProShares Short 20+ Year Treasury ETF provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. It has accumulated $184.6 million in its asset base and charges 90 bps in annual fees. Volume is solid at 398,000 shares a day on average.
ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report)
ProShares UltraPro Short 20+ Year Treasury ETF also offers three times the inverse performance of the ICE U.S. Treasury 20+ Year Bond Index. It has AUM of $126.5 million and an average daily volume of roughly 76,000 shares. The expense ratio comes in at 0.95%.
ProShares UltraShort 7-10 Year Treasury (PST - Free Report)
ProShares UltraShort 7-10 Year Treasury seeks to offer two times the inverse the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index, charging 95 bps in annual fees. With AUM of $26 million, the fund trades in a volume of 48,000 shares a day on average.
Bottom Line
As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may force these products to deviate significantly from the expected long-term performance figures (see: all the Inverse Bond ETFs here).
Still, for ETF investors who believe that yields will continue to rise, any of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance and a belief that the trend is the friend in this corner of the investing world.
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Bets on Higher Rates Trigger Rally in Inverse Treasury ETFs
The U.S. Treasury yields have been on a surge lately, driven by expectations that the Fed will keep interest rates higher for longer to fight inflation and downgrade of the U.S. credit rating by Fitch Ratings. The 10-year yields surged to 4.28%, the highest level since June 2008.
This has raised the appeal for ETFs that bet against U.S. Treasury bonds. Some of the popular ones that target the long-end of the yield curve include ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report) , Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) , ProShares Short 20+ Year Treasury (TBF - Free Report) , ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report) and ProShares UltraShort 7-10 Year Treasury (PST - Free Report) .
Inverse ETFs provide opposite exposure that is a multiple (-1X, -2X or -3X) of the performance of the underlying index using various investment strategies, such as swaps, futures contracts and other derivative instruments. These ETFs could be worth buying for huge gains in a short span arising from rising yields.
The latest minutes from the Fed's July meeting showed that “most” policymakers continued to prioritize the battle against inflation, while “some participants” cited risks to the economy from pushing rates too far. The latest data on retail sales also stoked fears of continued higher interest rates. U.S. retail sales came in better than expected, rising 0.7% in July (read: ETF Areas & Stocks to Win on Upbeat July Retail Sales).
Additionally, inflation in the United States rose for the first time in July after 12 straight months of decline. The Consumer Price Index rose 3.2% year over year, up from an increase of 3% in June, which was the lowest in over two years. Although inflation has dropped from a peak of 9.1%, it is still significantly above the Federal Reserve's 2% target.
Meanwhile, Fitch Ratings downgraded the U.S. credit rating to AA+ from AAA, citing “expected fiscal deterioration over the next three years,” an erosion of governance and a growing general debt burden. This has pushed U.S yields higher.
ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report)
ProShares UltraShort 20+ Year Treasury ETF seeks two times the inverse daily performance of the ICE U.S. Treasury 20+ Year Bond Index. It is the most popular and liquid ETF in the inverse Treasury space, with AUM of $492.1 million and an average daily volume of 2.7 million shares. ProShares UltraShort 20+ Year Treasury ETF charges 89 bps in annual fees.
Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report)
Direxion Daily 20+ Year Treasury Bear 3x Shares offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $321.1 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 309,000 shares a day on average (read: Rates to Remain Higher for Longer? ETFs to Benefit).
ProShares Short 20+ Year Treasury ETF (TBF - Free Report)
ProShares Short 20+ Year Treasury ETF provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. It has accumulated $184.6 million in its asset base and charges 90 bps in annual fees. Volume is solid at 398,000 shares a day on average.
ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report)
ProShares UltraPro Short 20+ Year Treasury ETF also offers three times the inverse performance of the ICE U.S. Treasury 20+ Year Bond Index. It has AUM of $126.5 million and an average daily volume of roughly 76,000 shares. The expense ratio comes in at 0.95%.
ProShares UltraShort 7-10 Year Treasury (PST - Free Report)
ProShares UltraShort 7-10 Year Treasury seeks to offer two times the inverse the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index, charging 95 bps in annual fees. With AUM of $26 million, the fund trades in a volume of 48,000 shares a day on average.
Bottom Line
As a caveat, investors should note that such products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may force these products to deviate significantly from the expected long-term performance figures (see: all the Inverse Bond ETFs here).
Still, for ETF investors who believe that yields will continue to rise, any of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance and a belief that the trend is the friend in this corner of the investing world.