The iShares 7-10 Year Treasury Bond ETF (NYSEArca: IEF) and the iShares 7-10 Year Treasury Bond ETF (NYSEArca: TLT) are among the 10 best ETFs this year in terms of asset-gathering proficiency.
Combined, IEF and TLT have brought in almost $4.6 billion, underscoring the difficulty of betting against an asset class that in 2013 was cast aside. With rates falling 50 basis points this year, traders have closed out their short positions and then bought into the market, pushing yields even lower in the latest round of short-covering, reports Ben Eisen for MarketWatch. [Treasury ETFs Strengthen on Growth Uncertainty, Short-Covering]
Despite the bullishness in IEF, TLT and other Treasury ETFs, some investors have insisted on trying to time another yield spike, using bearish Treasury futures contracts or the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) as they wait for yields to rise above 3%. [Inverse Bond ETFs: 2014’s Definition of Insanity]
TBT is perhaps the most well-known leveraged Treasuries on the market. Nearly $4.6 billion in assets under management at the end of last year affirms as much. However, adventurous traders can play normally staid Treasuries for out-sized gains on the upside and downside with the following ETFs.
As inverse and leveraged products, the following group is geared toward risk-tolerant traders that have the ability to closely monitor their positions. When a bearish ETF is featured, we were sure to include its long equivalent and vice-versa for the bullish members of this list.
ProShares Ultra 7-10 Year Treasury (NYSEArca: UST)
Bearish Equivalent: ProShares UltraShort Lehman 7-10 Year (NYSEArca: PST)
Comment: This is one way of looking at UST: Investors that are convinced IEF is moving higher can apply that conviction to UST. UST, which is one of the largest leveraged Treasury ETFs after TBT, attempts to deliver twice the daily returns of the Barclays U.S. 7-10 Year Treasury Bond Index. That is also IEF’s underlying index. UST has done an excellent job of performing as advertised. IEF is up just under 4% this year while UST is higher by almost 8%.
PowerShares DB 3x Long 25+ Year Treasury Bond ETN (NYSEArca: LBND)
Bearish Equivalent: PowerShares DB 3x Short 25+ Year Treasury Bond ETN (NYSEArca: SBND)
Comment: As ETNs, LBND and SBND are debt instruments. LBND tracks the DB Long U.S. Treasury Bond Futures Index. Its annual fee of 0.95% is hefty compared to standard Treasury ETFs, but LBND has rendered those high fees a moot point with a year-to-date gain of 36%. The trigger for further upside for LBND would likely be 30-year Treasury yields dipping below 3.3%. That level was touched Thursday for the first time in almost a year.
Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: RMV)
Bullish Equivalent: Direxion Daily 20-Year Treasury Bull 3X (NYSEArca: TMF)
Comment: TMF has been the way to go this year, but like TBT, TMV has tempted investors. Tempted to the tune of over $87 million in inflows at a time when longer-dated Treasury ETFs have been one of this year’s sturdier asset classes.
“When it comes to leveraged fund products that track daily results, their returns over time are the product of a series of daily returns,” according to Direxion. “They are not the fund’s leverage point multiplied by the cumulative return of the index for periods greater than a day. During periods of high volatility where markets lack a directional trend, returns can be impacted in a negative way should the funds be held for long periods.” [Attractive Alternative Treasury ETFs]
Direxion Daily 7-10 Year Treasury Bull 3X Shares (NYSEArca: TYD)
Bearish Equivalent: Direxion Daily 7-10 Year Treasury Bull 3X (NYSEArca: TYO)
Comment: TYD ratchets up the double leverage found in UST into a triple-leveraged wrapper. TYD will not astound day traders looking for massive volume as its average turnover for the trailing three-months is just 2,750 shares per day. However, the fund is a viable option for active swing traders as it has returned 14% this year, indicating it has done a fine job of the YSE 7-10 Year Treasury Bond Index (AXSVTN) on a triple-leveraged basis. [Inverse Treasury ETFs Thrive as Rates Soar]
ProShares UltraShort TIPS (NYSEArca: TPS)
Comment: TPS, which does not have a bullish equivalent, attempts to deliver twice the daily inverse daily performance of the Barclays Capital US Treasury Inflation Protected Securities (TIPS) Index. As is the case with traditional Treasuries, betting against TIPS has been a losing proposition in 2014.
While this does not mean TPS is the best long idea right now, it is interesting to note investors have not been believers in the upside of TIPS this year. Although it is up 4.2%, the iShares TIPS ETF (NYSEArca: TIP) has lost $351.7 million this year.
TIP, the largest TIPS-related ETF, has an effective duration of 7.68 years and comes with a 5.53% 30-day SEC yield, or a 0.13% real yield after adjusting for inflation. [6 Ways to Fight Inflation with ETFs]
Tom Lydon’s clients own shares of TIP and TLT.