Capitalize on Yield Surge With Inverse Treasury ETF

The U.S. Treasury yields are on the rise with the start of second-quarter 2024, as the hopes for interest rates cut in June cooled down following the hotter-than-expected manufacturing data. The 10-year yield climbed to 4.40%, the highest since late November 2023, whereas 2-year yields touched a fresh two-week high of 4.73%.

Amid rising yields, investors should put their money in ETFs that bet against the U.S. Treasury bonds. For them, we have highlighted some inverse or leveraged inverse ETFs that could be worth buying for huge gains in a short span. These include ProShares Short 20+ Year Treasury ETF TBF, ProShares UltraShort 20+ Year Treasury ETF (TBT), Direxion Daily 20+ Year Treasury Bear 3x Shares TMV, ProShares UltraPro Short 20+ Year Treasury ETF TTT and Direxion Daily 7-10 Year Treasury Bear 3X Shares TYO.

Inverse ETFs provide opposite exposure, which 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.

Investors have started feeling less confident about the pace of rate cuts for this year, given the resilient economic activities. Manufacturing activities unexpectedly expanded in March 2024 for the first time since September 2022, according to data by the Institute for Supply Management, on a sharp rebound in production and stronger demand. In February, new orders for the United States-manufactured goods grew more than expected, boosted by demand for machinery and commercial aircraft. Meanwhile, job openings, a measure of labor demand, held steady at higher levels in February.

Per the latest CME's FedWatch tool, the US rate futures market is now pricing in a 63.59% chance of a rate cut in June, down from about 70% a week ago (read: No Rate Cut Until Summer? High-Yield Short-Term Bond ETFs to Buy).

ETFs to Play

ProShares Short 20+ Year Treasury ETF (TBF)

ProShares Short 20+ Year Treasury ETF provides inverse exposure to the ICE U.S. Treasury 20+ Year Bond Index. It has accumulated $89.9 million in its asset base and charges 92 bps in annual fees. Volume is solid at 345,000 shares a day on average.

ProShares UltraShort 20+ Year Treasury ETF (TBT)

ProShares UltraShort 20+ Year Treasury ETF seeks two times 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 an AUM of $314.9 million and an average daily volume of 932,000 shares. ProShares UltraShort 20+ Year Treasury ETF charges 90 bps in annual fees.

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

Direxion Daily 20+ Year Treasury Bear 3x Shares offers three times the inverse exposure to the same ICE U.S. Treasury 20+ Year Bond Index. With an AUM of $220.9 million, Direxion Daily 20+ Year Treasury Bear 3x Shares charges 88 bps in fees and trades in a solid volume of 2.4 million shares a day on average.

ProShares UltraPro Short 20+ Year Treasury ETF (TTT)

ProShares UltraPro Short 20+ Year Treasury ETF also offers three times the inverse performance of the same index. It has an AUM of $42.2 million and an average daily volume of roughly 16,000 shares. Its expense ratio is at 0.95%.

Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO)

Direxion Daily 7-10 Year Treasury Bear 3X Shares provides three times the inverse performance of the ICE U.S. Treasury 7-10 Year Bond Index. It charges 95 bps in annual fees and trades in an average daily volume of roughly 23,000 shares. Direxion Daily 7-10 Year Treasury Bear 3X Shares has accumulated $13.9 million in its asset base.

Bottom Line

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 believe that yields will continue to rise, at least in 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.

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ProShares UltraShort 20+ Year Treasury (TBT): ETF Research Reports

Direxion Daily 20+ Year Treasury Bear 3X Shares (TMV): ETF Research Reports

ProShares UltraPro Short 20+ Year Treasury (TTT): ETF Research Reports

Proshares Short 20+ Year Treasury (TBF): ETF Research Reports

Direxion Daily 7-10 Year Treasury Bear 3x Shares (TYO): ETF Research Reports

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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