ProShares highlights the capital and income destruction caused by rising rates, noting that just a 1% rise in interest rates could cause a $100,000 bond portfolio with a duration of six years to drop to a value of $94,000. A 2% increase in interest rates would wipe $20,000 out of a $100,000 bond portfolios with a duration of 10 years.
The notion of rising interest rates eroding bond investments has started to sink with investors. Since the start of August, TLT has seen outflows of nearly $293 million while investors have pulled almost $392 million from the iShares Core Total U.S. Bond Market ETF (NYSEArca: AGG) although AGG’s duration is just 5.1 years. [Outflows Show Bond Weakness Sinking In With Investors]
ProShares, the largest issuer of inverse and leveraged ETFs, notes that investors can take a more tactical approach and consider inverse bond ETFs as a way of coping with rising rates.
“Using inverse bond ETFs to hedge interest rate risk is an approach that can complement and enhance longer-term strategic moves,” said ProShares. Use of inverse bond ETFs does not require opening a margin, futures or other account that employs leverage. Investors can use funds such as the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) and the ProShares UltraShort 7-10 Year Treasury (NYSEArca: PST), which have one-day return objectives, without disrupting a core fixed income strategy.
TBT is up 17% in the past three months while PST is higher by nearly 9% over the same time.
ProShares UltraShort 7-10 Year Treasury
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of TLT.