The global economies now reveal that the Treasury market has been out of favor in investment circles due to rising inflation and looming FED’s tightening policies. Couple this with Powell’s statement that interest rate hike can be expected as early as the first quarter of 2022, and what you have is an opportunity to bet on inverse funds and mint a cash-load of money.
Best inverse Treasury ETFs: how do they work?
Exchange-traded funds consist of a basket of investment assets with similar characteristics. These ETFs then track the performance of a particular index with similar assets as their holding base with a view of replicating their performance.
Treasury ETFs, therefore, are made up of treasury bonds, suitable for investing in when interest rates are low. So, what happens when interest rates and inflation start rising?
You invest in inverse Treasury ETFs, which are bullish when the bond market is bearish. To achieve their objective, inverse treasury funds invest in derivatives, thus facilitating an inverse performance to the tracked index.
There are two inverse Treasury ETFs available to investors expecting the bond market to be bearish:
- Inverse Treasury ETFs seek proportionate inverse performance to the tracked bond index.
- Leveraged inverse Treasury ETF, which seeks amplified inverse results to the tracked bond index.
What to consider before buying Inverse ETFs
At face value, these funds move in the opposite direction to their composite index. However, investing in ETFs calls for experience and skill since the movement of inverse ETFs is much more nuanced. As such, the considerations below should be at the forefront of the mind when investing in inverse ETFs:
Leveraged inverse treasury funds amplify the returns but also amplify the losses hence call for close monitoring.
- Daily repricing
Inverse treasury funds are repriced daily; hence should not be used for buy and hold strategies. The compounding effect is in the investors’ favor when making profits, but the same applies when making losses.
Which are the best inverse Treasury ETFs to buy in 2022
With federal reserves and central banks encouraging inflation and interest rate hike in an attempt to spur full economic resumption, the inverse treasury ETFs below have the potential to result in portfolio profitability.
№ 1. The ProShares Short High Yield ETF (SJB)
Expense ratio: 0.95%
The ProShares Short High Yield ETF tracks the performance of the Markit iBoxx Liquid High Yield Index, seeking inverse results to the composite index, -1x. It invests in financial instruments that will result in the achievement of its objective daily. The SJB provides a hedge option for investors with bullish positions in dollar-denominated US high yield highly liquid corporate bonds.
The ProShares Short High Yield ETF has only two holdings:
- USD — 85.76%
- United States Treasury Bills 0.0% 28-OCT-2021 — 14.24%
SJB has $53.59 million in assets under management, with an expense ratio of 0.95%. Due to their higher interests, there has been an increased appetite for junk bonds for the risk-tolerant investor group. There has been a lot of debt floated by distressed companies due to the coronavirus pandemic, and with economic resurgence slowing down, these organizations are still in precarious financial condition. As a result, high yield bonds are bearish, providing an opportunity for investors to offset their losses via the SJB in 2022.
№ 2. Invesco DB US Dollar Index Bearish Fund ETF (UDN)
Expense ratio: 0.75%
The Invesco DB US Dollar Index Bearish Fund ETF tracks changes in the Deutsche Bank Short US Dollar Index Futures Index, both positive and negative. This ETF tracks the index by having short positions in the DX Contract, which pits six currencies against the dollar; euro, Canadian dollar, Japanese yen, Swedish krona, British pound, and the Swiss franc.
The top three holdings of this ETF are:
- Mutual Fund (other) — 54.86%
- The United States Treasury Bills 0.0% 09-DEC-2021 — 12.45%
- The United States Treasury Bills 0.0% 10-MAR-2022 — 12.45%
UDN has $71.82 million in assets under management, with an expense ratio of 0.75%. This ETF is not a pure-play inverse Treasury ETF but an alternative to playing the bond market by betting against the USD.
Presently, the US public debt is at an all-time high, with analysts that the government might run bankrupt. With this in mind, the green buck is struggling against the other DX contract currencies. Biden is asking for more funding to fund massive infrastructural projects, and the UDN is an indirect 2022 option to play the government bond market.
№ 3. Direxion Daily 20+ Year Treasury Bear 3x ETF (TMV)
Expense ratio: 1.01%
The TMV fund tracks the ICE US Treasury 20+ Year Bond Index, intending to return 300% the inverse performance of its composite index. It exposes investors to bearish leveraged Treasury debt instruments with a maturity period of more than twenty years.
Unlike the other inverse treasury funds on this list, the TMV has only the iShares 20+ Year Treasury Bond ETF as its holding base.
The top three holdings of this ETF are:
Goldman Sachs FS Treasury Intms Instl — 48.36%
|Dreyfus Government Secs Cash Mgmt Admin — 16.57%
Ishares 20+ Year Treasury Bond Etf Swap — 2.52%
TMV has $291.19 million in assets under management, with a relatively high expense ratio of 1.01% among all the listed inverse treasury funds here. This fund is for sophisticated investors knowledgeable on the economy’s inner workings, the current policies and regulations, and any future enforcements, given the 3-factor leverage.
With interest rates expected to start as early as the first quarter of 2022, this ETF offers an excellent profit-making avenue for the requisite short-term bearish outlook on the 20-year plus bonds.
Bonds provide a haven investment asset in times of low-interest rates. To spur economic recovery as fast as possible, economies are letting inflation run. As a result, interest rates will follow, strategically placing the inverse treasury funds above to benefit if invested wisely.