Bond ETFs

Is it Time to Short Long-Term Bonds with This Fund?

With the Fed widely expected to raise interest rates several times in 2018, we turn our attention to an exchange-traded fund (ETFs) that could benefit from the rate hikes.

The ProShares UltraShort 20+ Year Treasury (TBT) stands out as a strong contender. As bond prices and interest rates are inversely related, this means that an increase in interest rates leads to a decrease in bond prices and vice versa. Because of its bond bear nature, some investors consider TBT a good hedge against inflation.

As its name implies, TBT shorts, or bets against, U.S. Treasury bonds with maturities greater than 20 years. TBT uses leverage to provide investors with twice the inverse of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index. Note that TBT resets its holdings daily, meaning that its holdings are actively evaluated on a day-to-day basis and changed by management as deemed necessary.

In the chart below, you can see that TBT has been on a downward trend since the beginning of 2017. However, that trend has reversed in 2018, thanks to the Fed’s plan to gradually raise rates. TBT’s one-year return is -1.96%, but its year-to-date return is 14.24%. TBT has an expense ratio of 0.90%.

As an inverse ETF, TBT’s portfolio makeup is very different from regular ETFs. Because it shorts Treasuries rather than holds them, the fund has “negative” holdings in its portfolio. As of Feb. 12, TBT holds -28.57% in Swap Goldman Sachs International bonds, -24.60% in Swap Societe Generale bonds and -22.82% in Citibank bonds.

For investors who are seeking a way to benefit from the upcoming Fed interest rate hikes, I encourage you to look into ProShares UltaShort 20+ Year Treasury (TBT).

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an email. You just may see your question answered in a future ETF Talk.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.