Bonfire of the Shorts: Leveraged Inverse Treasury ETF

July 17th at 2:21pm by John Spence

Last week we looked at a pair of ETFs that have vaporized millions of dollars of investor capital in recent years. One fund that might deserve to be added to the list is a leveraged inverse ETF that bets against Treasury bonds.

ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) holds $2.9 billion in assets.

Although the leveraged bearish ETF is designed as a trading vehicle rather than a buy-and-hold investment, it has shed more than half its value over the past 12 months.

For the year ended July 16, TBT was down 55.2%, according to Morningstar.

The ETF seeks daily investment results, before fees and expenses, that correspond to 200% the inverse, or opposite, of the daily performance of the Barclays Capital U.S. 20+ Year Treasury Index, according to manager ProShares.

The leveraged ETF has been mauled by falling Treasury yields and higher bond prices.

For example, iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT) hit a new lifetime high earlier this week on the Eurozone debt crisis and worries over U.S. economic growth. [Treasury ETF Hits New All-Time High]

Many traders in TBT have been burned on speculation the multi-decade bull run in U.S. government debt is finally drawing to a close. [Short ETFs: U.S. Treasury Bonds]

“Investors interested in this fund essentially think the unprecedented moves by the Federal Reserve to pump liquidity into the financial system will ultimately result in higher inflation and sinking dollar value. Investors should also hold the thesis that the flight to quality will ultimately reverse itself, causing Treasury rates to rise,” writes Morningstar analyst Timothy Strauts in a profile of TBT.

“Investors should hold this speculative bearish conviction with a high degree of certainty in order to take on the amplified risks and returns that this double-short position provides,” he said. “Remember, though, that because of the compounding arithmetic, investors are not guaranteed to get double the index’s inverse return for any holding period longer than one day.”

ProShares UltraShort 20+ Year Treasury

Full disclosure: Tom Lydon’s clients own TLT.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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