Back to top

Image: Bigstock

4 Ways to Profit From Rising Yields With Inverse Treasury ETFs

Read MoreHide Full Article

The U.S. Treasury market has been out of investors’ favor this year, piling up heavy losses. This is especially true as Treasury yields have been on the rise with the 10-year yield, which began 2021 at 0.930%, hit a high of 1.614% on Feb. 25 and is currently hovering around 1.55%.

Inside the Surge in Yields

Growing inflationary expectations triggered by a quicker economic rebound is pushing the yields higher. A market proxy for the anticipated annual inflation rate for the next half decade topped 2.5% for the first time since 2008 — aided by rising oil prices.

The massive money flowing into the economy coupled with hopes of more fiscal stimulus is expected to lift inflation and in turn driving long-term yields higher. Additionally, a recent spike in commodity prices, especially oil and metals, as well as the wider reach of COVID-19 vaccinations has lifted inflationary expectations. President Joe Biden announced the availability of enough doses of virus vaccine to every American adult by the end of May (read: ETFs to Ride the Oil Rally on Lower Supply & Dovish Fed).

Given that the recent data has shown some signs of economic improvement, one analyst, Goldman (GS - Free Report) , expects 10-year U.S. Treasury yields to move higher to 1.9% by the end of 2021. Another analyst, TD Securities, expects yields to go higher to 2%, up from the previous forecast of 1.45%.

Further, Fed Chairman Jerome Powell has pledged to maintain its accommodative stance and said that inflation is likely to rise as economic recovers, but the increase will be temporary. The central bank will continue to buy $120 billion in Treasury and mortgage-backed securities per month, allowing inflation to move in an average range that could rise above its 2% target without triggering a rate hike.

Against such a backdrop, investors are putting their money in ETFs that bet against U.S. Treasury bonds. For them, we have highlighted four inverse or leveraged inverse ETFs that could be worth buying for huge gains in a short span.

How to Play?

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. All these have witnessed solid gains so far this year.

ProShares Short 20+ Year Treasury ETF (TBF - Free Report)

This product provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. The index holds 40 securities in its basket with an average maturity of 25.80 years and modified duration of 19.32 years. The fund has accumulated $471.4 million in its asset base and charges 94 bps in annual fees. Volume is solid at 1.2 million shares a day on average. The ETF has gained 12.7% so far this year.

ProShares UltraShort 20+ Year Treasury ETF (TBT - Free Report)

This ETF seeks two times (2x or 200%) 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 $964.2 million and an average daily volume of 3.4 million shares. The fund charges 92 bps in annual fees and is up 27.6% in the year-to-date timeframe (read: Inverse Treasury ETFs to Win as Yields Jump).

Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report)

This ETF offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With AUM of $217.7 million, the fund charges 95 bps in fees and trades in a solid volume of 468,000 shares a day on average. It has surged 42.6% in the same timeframe.

ProShares UltraPro Short 20+ Year Treasury ETF (TTT - Free Report)

This fund also offers three times the inverse performance of the same index. It has AUM of $68.1 million and an average daily volume of roughly 140,000 shares. Expense ratio comes in at 0.95%. TTT has gained 43.5% so far this year.

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 are bearish on Treasuries for the near term, 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 trend is the friend in this corner of the investing world.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>