5 Inverse-Bond ETFs

Key Takeaways

The ETF industry is celebrating its 30-year anniversary in 2023 and has introduced a wider range of investors to newer, unique and more complex ETFs.
One class of ETFs is the inverse bond ETF that allows investors to profit from increasing interest rates that also hurt bond prices.
ProShares Short 20+ Year Treasury, ProShares Short 7-10 Year Treasury, and ProShares Short High Yield are examples of inverse bond ETFs that let investors go short on the bond market of different maturities and types.
These ETFs have different underlying bond indices, liquidity, and expense ratios that investors need to consider.
Leveraged ETFs like the Direxion Daily 20+ Year Treasury Bear 3x ETF and ProShares UltraPro Short 20+ Year Treasury are intended only for short holding periods, such as intraday trading.

ProShares Short 20+ Year Treasury (TBF)

The ProShares Short 20+ Year Treasury (ARCA:TBF) seeks to match the inverse of the daily performance of the ICE U.S. Treasury Bond market. The underlying index invests in Treasury securities with maturity dates greater than 20 years. Because of the correlation between bond prices and yield, the ETF hasn't performed well at all over the past five years, which is due to the simple fact that bond yields have been falling over that period. However, as rates have ticked up over the past several months, the ETF has risen in value from around $15 in 2021 to over $21 per share as of April 2023.

The expense ratio is rather lofty for an ETF at 90 basis points (BPS), or 0.90%. However, it is fairly liquid with nearly $209 million in assets. If longer-term rates continue to increase, the fund would continue its run and likely also pick up additional assets.

ProShares Short 7-10 Year Treasury (TBX)

Investors that are bearish on the outlook for bonds will have to make a decision on how far out they want to go on the maturity scale. ProShares also offers a more medium-term maturity inverse fund in the form of its ProShares Short 7-10 Year Treasury (ARCA:TBX). It seeks to match the inverse of the daily performance of the ICE U.S. 7-10 Year Treasury Bond Index. Expenses are relatively again high at 0.95% and it has only been around since April 2011. Its assets under management are also quite small at $43 million as of April 2023.

ProShares Short High Yield (SJB)

The ProShares Short High Yield (ARCA: SJB) seeks the inverse of the daily price performance of the Markit iBoxx $ Liquid High Yield Index. Investors may have noticed that high-yield bonds, also known as "junk bonds," can be attractive to some investors to boost the overall yield in their portfolios. A collapse in junk bond prices would do wonders for this ETF. SJB's expense ratio is 0.95% and the fund holds around $273 million AUM as of April 2023.

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

The Direxion Daily 20+ Year Treasury Bear 3x ETF (ARCA:TMV) offers bond buyers opportunity to wager big on a rise in interest rates or significant drop in demand for Treasury Bond buying. The ETF seeks a 300% inverse benefit from the NYSE/ICE 20 Year Plus Treasury Bond Index. So when 20-year bond prices falls by 1%, this ETF should rise by 3% (and when the index rises 1% the ETF loses 3%). This is because TMV is an inverse leveraged ETF, which amplifies its returns by a multiple of the index's actual returns.

The expense ratio is again high for an ETF at 1.01%, but the fund is so volatile that a 1% drag on profits or additional cost might actually be less significant for traders. But leveraged ETFs like TMV (especially those with negative 3x leverage) are intended only to be held for very short holding periods such as intraday.

ProShares UltraPro Short 20+ Year Treasury (TBT)

ProShares UltraPro Short 20+ Year Treasury (ARCA:TBT) is similar to TMV but offers negative 2x the return of 20-year U.S. Treasuries based on the same bond index. TBT has a 0.90% expense ratio, and like other leveraged ETFs is intended only for intraday trading and not for longer holding periods.

How Do Inverse Bond ETFs Work?

Inverse bond ETFs are exchange-traded funds that provide investors with the ability to benefit from a decline in bond prices caused by rising interest rates. These ETFs use a variety of investment strategies to achieve inverse returns, including shorting bond futures, owning put options on bonds, or holding short positions directly in bonds.

What Are the Risks Associated with Inverse Bond ETFs?

Inverse bond ETFs are complex financial products that carry a range of risks that investors should be aware of. These risks include the possibility of significant losses due to market volatility, leverage, and liquidity issues. The largest risk with inverse bond ETFs is that bond prices rally during a falling interest rate environment.

Inverse leveraged ETFs are designed to provide returns that are amplified in the opposite direction to their benchmark indices over a single trading day, which means that they are not suitable for long-term investors. Investors should carefully consider their investment goals, risk tolerance, and time horizon before investing in any of these complex products.

Why Do Bond Prices Fall When Interest Rates Rise?

The reason why bonds prices drop when interest rates go up is that most bonds are fixed-income investments that pay a fixed interest rate to investors over the bond's life. If interest rates rise after a bond is issued, newer bonds will offer relatively higher interest rates, making the older bonds with lower interest rates less attractive to investors. As a result, the prices of these older bonds will have to fall in order to make them more attractive to investors. Conversely, if interest rates fall, existing bonds with higher interest rates would become more attractive to investors, causing their prices to rise in the market.

Are There Tax Implications for Holding Inverse Bond ETFs?

Yes. Investing in inverse bond ETFs can have tax implications for investors, including short-term capital gains taxes that are triggered by selling shares of the ETF for a profit within one year of purchase. Investors should also be aware of the potential for tax inefficiency inside of inverse ETFs, which can result from the fund's use of derivatives and other even more complex investment strategies over longer holding periods. It's recommended that investors consult with an accountant or tax advisor before investing heavily in inverse bond ETFs.

The Bottom Line

Inverse bond ETFs allow investors to profit from declining bond prices caused by increasing interest rates. These ETFs use a variety of underlying indices that cover various segments of the bond market from U.S. Treasuries to high yield corporate bonds, which deliver inverse returns that can help investors protect their portfolios against interest rate risk and to profit from a rising interest rate environment. Some inverse bond ETFs also use leverage to amplify their returns, but these are intended only for short holding periods, such as intraday trading. It's important for investors to carefully consider the expense ratios, risks, and other factors associated with inverse bond ETFs before investing in them.

At the time of writing, author Ryan C. Fuhrmann did not own any shares in any company mentioned in this article.

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