With the major U.S. stock indexes hovering around their all
time highs, it can be safely argued that risk on attitude has
totally swept the market. Investors' flight to safety seems to
have taken a back seat, putting pressure on bonds across the
Be it the Fed-induced liquidity that is driving the markets
higher or a better looking economic picture across the globe that
is causing the market surge, one thing is certain-investors are
back in the market (read
A Closer Look at Market Vectors' New BDC Income
In 2013 alone, the equity mutual funds and
have seen a massive surge in asset inflows. However, is the flow
of money into equity funds at the expense of sell-offs in bonds,
or is it the fresh money being flown into equities?
For that could be a different matter of discussion altogether.
In fact, with so much of money being circulated in the economy it
is kind of hard to figure that out.
Considering the series of monetary easing measures of the Fed
in the recent past, it was primarily aimed at playing the role of
a catalyst to stir up an economic recovery. Also, another motive
was to induce investors to take on more risk and thereby get the
economy moving again.
And with the stock markets surging as well as a series of
economic indicators pointing towards the positive side, it can be
said that the primary goals of the monetary easing has been
achieved. Even if that meant a massive expansion in the Fed's
balance sheet and increase in the U.S. debt burden (read
Three Country ETFs Struggling in 2013
With this backdrop, a spike in the interest rates across the
board could come sooner rather than later, as the excess
liquidity has to be sucked back when the economy is back on
track. However, the key question still remains: when?
Nevertheless, speaking of bonds as an investment vehicle, things
look extremely dicey at the present moment.
High yield corporate bonds have reached a point where their
issuing companies face the risk of defaulting on their payment
obligations merely due to the size of their debt burden in their
Treasury bonds yields have been inching upwards as investors
get back to equities. Also, with the already low Treasury
interest rates in place, there is very little room for a further
On the other hand, emerging market bonds which attract
investors due to their high yields face serious currency risk.
This is especially true considering the strength exhibited of
late by the U.S. dollar versus other currencies (see
Emerging Market ETFs to Soar in 2013?
However, investment grade corporate bonds look decent enough
as they offer relative stability and decent yields without the
risk of default. But, the upside is capped primarily due to the
extremely low interest rate scenario in the economy.
Given the present circumstances, it might be interesting to
look into some inverse bond ETFs to capitalize on any interest
rate spike in the economy.
Fortunately, there are a number of choices out there for
investors, although they tend to be heavily concentrated in the
Treasury bond space. Still, these could very well be great plays
if interest rates creep higher, suggesting investors should take
a closer look at the following niche ETFs:
For a conservative mindset, the
ProShares Short 20+ Year Treasury ETF (
seeks to provide daily inverse exposure to the Barclays Capital
U.S. 20+ Year Treasury Index.
This benchmark is comprised of Treasury Bonds having a
residual maturity of 20 years or more. The ETF can be considered
a more conservative product as it provides -1x exposure to long
Furthermore, its performance is just a mirror image of the
performance of the
iShares Barclays 20+ Year Treasury Bond ETF (
which measures the regular performance of the same index. It
charges investors 95 basis points in fees and expenses.
However, its leveraged counterpart, the
ProShares UltraShort 20+ Year Treasury ETF (
can exhibit huge moves in a portfolio. Due to its 2X inverse
exposure, the returns may vary substantially than the targeted
factor over long time periods, due to compounding.
The ETF seeks to provide twice the daily inverse exposure to
the same index as TBF. TBT charges investors 92 basis points in
fees and expenses (read
Inside First Trust's New Preferred Securities ETF
Finally, aggressive investors can consider the
Direxion Daily 20+ Year Treasury Bear 3x ETF (
ProShares UltraPro Short 20+ Year Treasury ETF (
for 3 times the daily inverse exposure to long term Treasury
bonds having a residual maturity of more than 20 years. Needless
to say that in term of exposure to risk, both these ETFs are much
higher up the hierarchy.
TMV and TTT, both charge investors 95 basis points in fees and
In order to highlight the effects of the aforementioned ETFs
in a portfolio, the above graph is shown. The chart compares the
returns of the ETFs with the performance of TLT. And not
surprisingly, as we have already discussed, the ETF with higher
compounding multiples exhibit greater volatility.
Therefore, they are not good candidates for a buy and hold
strategy, but could be interesting picks if interest rates
continue to rise in a bullish trend over the next few weeks.
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PRO-SH 20+ TBI (TBF): ETF Research Reports
ISHARS-BR 20+ (TLT): ETF Research Reports
DIR-D 20Y+T BR3 (TMV): ETF Research Reports
PRO-ULT 3X20YT (TTT): ETF Research Reports
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