The interest rate ETF tries to achieve a negative duration through its short Treasury positions to hedge against potential losses if interest rates rise – bond prices have an inverse relationship to interest rates, so rising rates corresponds with falling bond prices.
Consequently, investors may find that the negative duration ETF tries to profit off a rising rate environment by heavily using short contracts to capitalize on falling bond prices if rates do rise. However, due to the more aggressive nature of this strategy, these types of ETFs will underperform if rates fall.
With a negative 10-year duration, investors may find that a 1% rise in U.S. Treasury yields could translate to about a 10% rise in RISE’s price. So the price moves nearly 10 times the change in yield. Duration is a measure of a bond funds sensitivity to changes in interest rates where negative durations reflect an inverse relationship and high durations reflect a significant sensitivity to rate changes.
The underlying portfolio is rebalanced monthly to maintain a negative 10-year average effective duration through short positions in Treasury instruments.
Nevertheless, potential investors should keep in mind that the ETF only has $10.7 million in assets under management with an average daily volume of 8,600 shares, according to Morningstar data, so people should utilize limit orders to better control trades.