Inverted Treasury bond ETFs have been a great way to hedge the risks of rising rates


IInverted or short Treasury bond exchange-traded funds have been a great way for investors to hedge against rising interest rate risks and capitalize on the pullback in government bonds this year.

For example, bond investors could take a position to hedge against falling bond prices or rising yields through simple inverse or short ETFs on Treasury bonds, such as the Direxion Daily 7-10 Year Treasury Bear 1x Stock (NYSEArca:TYNS), Direxion Daily 20+ Year Treasury Bear 1x Shares (NYSEArca: TYBS)Where ProShares Short 20+ Year Treasury (NYSEArca: TBF).

The Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEArca: VMT), which tracks the 300% daily short performance of the NYSE 20 Year Plus Treasury Bond Index, was a popular choice for more aggressive exposure to turns in the Treasury market. Moreover, the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) attempts to mirror the -2x or -200% daily performance of the Barclays US 20+ Year Treasury Bond Index and the ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT) takes the daily performance of -3x or -300% of the Barclays US 20+ Year Treasury Bond Index.

Betting on Treasuries falling or rates rising played out this year as yields on the benchmark 10-year Treasury stood at around 2.743% on Friday, down from 1.496% at the end of the month. year, reports the Wall Street Journal.

Investor and financial historian William Bernstein of Efficient Frontier Advisors, however, warned of the additional risks of leveraged inverse ETF strategies, or those that offer returns of -2x or even -3x of the undervalued market. underlying.

Bernstein told the WSJ, “Over the long term, these ETFs are a losing proposition.”

Nonetheless, ProShares chief executive Michael Sapir argued that ETFs do exactly what they were designed to do as tools for sophisticated investors who are hotly taken advantage of in the market. While offering the opposite return of some single-day Treasury bill price movements, leveraged returns can be higher or lower than those over the long term, particularly in extremely volatile market conditions in because of the cumulative effects of the single day. move, he warned.

“No one should invest in one of these funds – or any fund – unless they feel they want to do their homework to really understand the fund, the opportunity and the risk,” he said. Sapir told the WSJ.

Some have also used these short or bearish ETFs as a way to hedge market risk. For example, Clark Group Asset Management began building a position in the ProShares Short 20+ Year Treasury ETF in March 2021, and the ETF now represents around 20% of Clark Group’s fixed income portfolios. It hasn’t been a smooth ride since the position lost money as government bonds rallied.

“We’re just explaining that it’s a great hedge against rising rates,” Clark told the WSJ.

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