4 Inverse Bond ETFs To Watch As Rates Rise

The start of the fourth quarter has shaken the fixed income world thanks to the flow of positive data, resumption of Fed rate hike fears and European Central Bank’s (ECB) tapering talks. This pushed yields higher for the third consecutive day, with 10-year Treasury yields rising to 1.683% – the highest level in two weeks.

On the data front, U.S. manufacturing activity strongly rebounded in September with the ISM index rising to 51.5 from 49.4 in August. The recent consumer sentiment surveys have also been extremely positive with the monthly Consumer Confidence Index, measured by the Conference Board, climbing for the second consecutive month in September and currently hovering at its highest level since recession. Consumer confidence, as per the University of Michigan, climbed for the first time in four months, with the final index rising to 91.2 in September from the preliminary reading of 89.8 (read: ETFs & Stocks to Play as U.S. Manufacturing Grows).

These suggest increased spending and thereby pave the way for better economic growth giving rise to rate hike concerns. In fact, Richmond Federal Reserve President, Jeffrey Lacker, yesterday cited a strong case for a rate hike in December. Additionally, the probability of a Fed lift-off in December has increased to above 60% as per the federal-funds’ futures market while CME Group's (NASDAQ:CME) FedWatch Tool shows 63% chance of an increase in December.

Fresh worries that ECB will gradually cut its €80 billion bond buying program ahead of the planned conclusion in March 2017 and the risk-on trade have raised yields. As a result, investors are pulling their money out of the bond market, especially the longer ones as these are more vulnerable to an increase in interest rates. And opportunistic investors could capitalize on the beaten down Treasury bonds in the form of inverse ETFs.

For those investors, we have highlighted four inverse bond ETFs that could be worth buying for big gains in a short span. In fact, these products have provided outsized gains over the past few sessions. These create a short position or leveraged (2x or 3x) short position in the underlying index through the use of swaps, options, future contracts and other financial instruments.

ProShares Short 20+ Year Treasury ETF TBF

This product provides inverse exposure to the Bloomberg Barclays (LON:BARC) U.S. 20+ Year Treasury Bond Index. The index holds 34 bonds with an average maturity of 26.7 years and modified duration of 19.24 years. The fund has accumulated $704.8 million in its asset base and charges 94 bps in annual fees. Volume is solid at 2.2 million shares a day on average. The ETF was up 2.3% over the past five days (read: Bull Market for Bond ETFs Coming to an End?).

ProShares UltraShort 20+ Year Treasury (NYSE:TBT) ETF TBT

This fund seeks to deliver twice (2x) the inverse performance of the Bloomberg Barclays U.S. 20+ Year Treasury Bond Index. TBT is the most popular and liquid option in the inverse bond ETF space with AUM of about $2 billion and average daily volume of roughly 2.2 million shares. It charges 93 bps in annual fees from investors and gained 4.7% in the same time frame.

ProShares UltraPro Short 20+ Year Treasury ETF TTT

Investors having a more bearish view and higher risk appetite should keep a watch on TTT. This fund also tracks the same index but offers three times (3x) inverse exposure. It is often overlooked by investors as depicted by AUM of $68.4 million and average daily volume of under 25,000 shares. Expense ratio came in at 0.95%. TTT added 7.1% over the past five days.

Direxion Daily 20+ Year Treasury Bear 3x Shares TMV

This ETF offers three times (3x) the inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. The index holds 33 securities in its basket, and has an average maturity of 26.65 years and effective duration of 18.46 years. With AUM of $334.6 million, the fund charges 92 bps in fees and trades in a solid volume of 759,000 shares a day on average. It gained 7.2% in the same timeframe.

Bottom Line

As a caveat, investors should note that these products are suitable only for short-term traders as they are rebalanced on a daily basis (see: all the Inverse Bond ETFs here).

Still, for ETF investors who are bearish on the bond market for the near term, any of the above products could make for 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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Zacks Investment Research