With over $23 billion of assets under management, ProShares is
one of the leading providers of leveraged and inverse ETFs.
Presently, they are managing 132 funds in total and their current
lineup consists of products across asset classes including equity,
fixed income and even funds targeting volatility benchmarks (see
Use VIX ETPs to Profit From Market Volatility
). The company looks to expand its reach in the bond space, making
another addition to their inverse offering in the long term
Treasury bond space with the
ProShares UltraPro Short 20+ Year Treasury ETF (
Given the launch and great popularity of the company's
UltraShort 20+ Year Treasury ETF (
the launch can be viewed as a strategic move from ProShares in
order to strengthen their already dominant position in the geared
ETF space. Additionally, it could be coming at a great time since
bonds are at record highs and many are forecasting a crash in
Treasury bonds at some point in the near future (see
Forget About Low Rates With These Three Bond
In fact, yields are at pretty low levels with current rates
around 3.27%, with yearly highs coming in at about 4.45%. However,
going forward it is believed that the yields have significant
potential to increase in the near future, leading to a fall in the
benchmark index possibly resulting in good performance of funds in
Geared funds are also known as leveraged and inverse funds. With
an increasing appetite for risk among the investors, these products
have gained tremendous popularity over the recent years given their
high risk high reward characteristics.
Traditionally leveraged funds provide -1x, 2x or 3x the exposure
of the benchmark performance. For example, if the benchmark rises
by 1%, the ETF will rise by 2% and vice-versa, for a fund that
provides 2x the exposure. On the other hand an inverse leveraged
ETF bets against the positive movement of the underlying index,
usually over a single day.
In the case of inverse products, the opposite is true, although
time periods are usually one day as well. So in this case, if the
benchmark falls by 1%, the fund gains 2%, however, if the index
rises by 1%, the fund would lose 2% for an inverse leveraged fund
that provides -2x the exposure (
see UBS Launches Monthly Leveraged Real Estate
Securities ETN (RWXL)
TTT in focus
The newly launched TTT is an inverse bond ETF that seeks to
the exposure of the
of the Barclays Capital 20+ Year U.S. Treasury Bond Index, before
adjustments for fees and expenses of the fund. The index tracks the
performance of U.S Treasury bonds with maturities greater than or
equal to 20 years.
The fund short sells the bonds in order to provide -3x the
exposure. However, the fund may buy derivatives and swaps instead
of shorting the debt securities. Like most of its counterparts in
the geared ETF space, TTT is quite pricey as it charges investors
95 basis points a year in fees and expenses.
The fund employs daily rebalancing techniques as measured from
one NAV calculation to the next, which gives rise to compounding of
daily returns. This leads to a difference between the 'standard'
-3x the returns of the benchmark (as specified by the fund) and the
actual daily returns of the fund.
This phenomenon works really well during a
Is The Bear Market For Bond ETFs Finally Here?
) where the actual compounded
of the fund,
the standard -3x the compounded
of the index. Or during a
, where the actual compounded
of the fund is
than the standard -3x the compounded
of the index, leading to a win-win situation for the investor
during both market trends. However, during periods of high
volatility, this phenomenon can hurt the investor leading to larger
losses than what some investors might initially expect.
The fund typically targets bonds at the longer end of the yield
curve (i.e. 20 years and above) which are more sensitive to the
changes in interest rates. Since yields and prices of bonds move in
opposite directions, a slight increase in the yields may result in
a significant decrease in the prices of bonds and a slight decrease
in yields will result in a significant increase in its prices.
Technically speaking, long term debt securities have greater
leading to higher volatility than their short term
ProShares as a fund family is the market leaders when it comes
to the inverse and ETF space. The new product launch is just
another small offering in its already large base of geared exchange
traded products. However, talking of individual funds, the newly
launched fund may face severe competition from certain experienced
funds in this space:
PowerShares 3x Short 25+ Year Treasury Bond ETN (
Launched in July 2010, the inverse leveraged fund tracks, before
fees and expenses, the price and yield performance of the
Deutsche Bank Short U.S. Treasury Bond Futures
and gives exposure of 300% of the
of the Ultra T. Bond Futures
The index short sells Ultra T-Bond Futures, which are the future
contracts of U.S Treasury Bonds that do not mature until at least
25 years from now.
The index has AUM of $ 23.4 million and currently has an expense
ratio of 0.95%. This fund being an ETN will incur no tracking error
and will track the index perfectly since it will not buy or sell
securities in the benchmark (see
ETFs vs. ETNs: What's The Difference?
). However, the fund has experienced dismal performance returning
-60.75% in the past one year period.
Direxion Daily 20 Year Plus Treasury Bear 3x Shares (
This fund seeks investment results of
the inverse performance of the
NYSE 20 Year Plus Treasury Bond Index
by creating short positions in various derivative securities that
provides leveraged and unleveraged positions in the index. The
benchmark tracks the performance of the long term U.S Treasury
Bonds having maturity of 20 years or more.
The AUM of the fund is $367.8 million and it has an expense
ratio of 95 basis points. The fund has experienced significant
negative returns of 64.38% in the past one year, thanks to its
leveraged position and the oscillating market of long term Treasury
ProShares UltraShort 20+ Year Treasury (
This fund was launched by ProShares in mid 2008 and was
ProShares' second inverse ETF offering in the long term Treasury
bond space. Compared to the newly launched fund, TBT significantly
reduces volatility as it provides -2x the daily performance of the
same index instead of -300%.
However, this fund is also exposed to compounding risk as it
employs daily rebalancing techniques. Nevertheless, the fund is
extremely popular and has seen a whopping $ 3.79 billion worth of
inflow in its asset base and an average daily volume of 9.27
million shares. Due to its -2x exposure, the fund has performed
relatively better than the above two funds, returning -47% in the
past one year.
Given these above numbers, it is prudent to note that TTT may
see a significant amount of inflows in its asset base in the near
future. The new ETF also enjoys the high brand quality that comes
with being a part of the market leader in the inverse and leveraged
ETF space. However, these products fall under the "high risk, high
reward" category of financial instruments and investing in them
involves daily portfolio tracking and thus is not suitable for all
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