The Top 5 Inverse-Bond ETFs

This week, the exchange traded fund (ETF) industry celebrated its 20-year anniversary. According to an article posted by Yahoo! Finance, the first ETF was rolled out in January 1993. The SPDR Trust, also referred to as the SPDR S&P500 ETF (ARCA:SPY), was launched and collected $500 million in assets. As of June 2020, it is estimated to have more than $270 billion in assets to qualify as one of the largest out there.

Over the past two decades, ETF offerings have increased. Today, there is a bona fide arms race to introduce unique and more sophisticated ETFs, including those that allow investors to benefit from when an asset class declines in value. These include ETFs that let investors profit from increasing interest rates, which hurts bond prices because the two move in opposite directions. Below are five such ETFs that effectively let the investor go short the bond market.

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ProShares Short 20+ Year Treasury
The ProShares Short 20+ Year Treasury (ARCA:TBF) seeks to match the inverse of the daily performance of the ICE U.S. Treasury Bond market. The underlying index invests in Treasury securities with maturity dates greater than 20 years. Because of the correlation between bond prices and yield, the ETF hasn't performed well at all over the past five years, which is due to the simple fact that bond yields have been falling over that period. However, as rates have ticked up over the past several months, the ETF has risen in value and is over $16 per share as of June 2020.

The expense ratio is rather lofty for an ETF at 92 basis points (BPS), or 0.92%. However, it is fairly liquid with nearly $175 million in assets. If longer-term rates continue to increase, the fund would continue its run and likely also pick up additional assets.

ProShares Short 7-10 Year Treasury
Investors that are bearish on the outlook for bonds will have to make a decision on how far out they want to go on the maturity scale. ProShares also offers a more medium-term maturity inverse fund in the form of its ProShares Short 7-10 Year Treasury (ARCA:TBX). It seeks to match the inverse of the daily performance of the ICE U.S. 7-10 Year Treasury Bond Index. Expenses are again high at 95 BPS and it has only been around since April 2011. As such, its asset level is quite small at $15.5 million as of June 2020.

Direxion Daily 20+ Year Treasury Bear 3x ETF
The Direxion Daily 20+ Year Treasury Bear 3x ETF (ARCA:TMV) offers bond bills the opportunity to wager big on a rise in interest rates or significant drop in demand for Treasury Bond buying. The ETF seeks a 300% inverse benefit from the NYSE 20 Year Plus Treasury Bond Index. The expense ratio is again high for an ETF at 93 BPS, but the fund is so volatile that a 1% drag on profits or additional cost is going to be insignificant for investors. With the decrease in rates over the past few years, the ETF has basically been killed. Since the middle of 2009, the fund is down from $460 on a reverse-split adjusted basis - to a more recent $50. But with a reversal in rates, upside potential is just as great. This is not for the faint-hearted, whatsoever.

ProShares Short High Yield
The ProShares Short High Yield (ARCA: SJB) seeks the inverse of the daily price performance of the Markit iBoxx $ Liquid High Yield Index. Investors may have noticed that high-yield bonds, which is just a euphemism for junk bonds, is in the midst of a strong bull run as investors bid up these bonds to boost the overall yield in their portfolios. A reversal of rising junk bond prices would do wonders for this ETF. Expenses again stand at 95 BPS and the fund is a newcomer, having been rolled out back in March of 2011.

Invesco DB Inverse Japanese Govt Bond Future
The Invesco DB Inverse Japanese Govt Bond Future (ARCA: JGBS) represents a more exotic way to profit from any eventual increase in interest rates in Japan or if demand starts to peter out for Japanese government fixed income securities. It seeks the inverse of the performance of the DB USD Inverse JGB Futures Index. The Japanese economy has struggled for about as long as the ETF industry has been in existence, with yields among the lowest of developed countries. This may not be the case forever, but investors should definitely do their research before betting against a rise in Japanese rates.

The Bottom LineNew inverse-bond ETFs continue to be rolled out, so be sure to check with Morningstar or other financial service providers for an update list. The above offerings should give investors a good overview of some of the options out there. Overall, betting on a drop in an asset class must be made with sufficient due diligence, but there is a solid case to be made that the bull market in bonds is approaching an end.

At the time of writing, Ryan C. Fuhrmann did not own any shares in any company mentioned in this article.

Article Sources
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  1. Yahoo Finance. "A Brief History Of Exchange-Traded Funds."

  2. Yahoo Finance. "SPDR S&P 500 ETF Trust (SPY)."

  3. ProShares. "ProShares Leveraged and Inverse Treasury Bond ETFs."

  4. Yahoo Finance. "ProShares Short 20+ Year Treasury (TBF)."

  5. ProShares. "ProShares Short 7-10 Year Treasury."

  6. Yahoo Finance. "ProShares Short 7-10 Year Treasury (TBX)."

  7. Direxion. "TMF TMV."

  8. ProShares. "ProShares Short High Yield."

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