TBF: Investors Now Have a Dozen Inverse Bond Choices

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 |  Includes: TBF, TLT
by: Ron Rowland

The first inverse bond fund was introduced on March 3, 1995 with the launch of Rydex Juno (RYJUX), since renamed Rydex Inverse US Government Long Bond. Thursday, more than 14 years later, marked the introduction of ProShares Short 20+ Year Treasury (NYSEARCA:TBF). This is the first non-leveraged inverse exposure to long-term treasury securities.

While TBF may be the first ETF of its kind, 11 other inverse bond funds (seven mutual funds and four ETFs) have come before. What makes TBF unique is that the four existing inverse bond ETFs all employ 2x or 3x leverage.

The press release notes that ProShares Short 20+ Year Treasury (TBF) attempts to “produce 100% of the inverse performance of the Barclays Capital 20+ Year U.S. Treasury Index for a single day, excluding fees and expenses.” Its inverse exposure is reset daily, meaning its long-term performance will likely not be the exact opposite of the underlying index.

The potential for long-term mismatches that has many investors upset (my article on class action suit) is possible even in unleveraged inverse funds. However, the use of leverage magnifies the effect of daily compounding.

TBF has a 0.95% expense ratio and additional information can be found in the fund overview. Before taking a long-term position in TBF, potential investors would be well advised to look at the performance of RYJUX versus iShares Barclays 20+ Year Treasury Bond Fund (NYSEARCA:TLT) during volatile periods. With many brokers now placing restrictions on ETFs of this type (my article on the banning leveraged and inverse ETFs), you may have to acknowledge your understanding of the risks involved before they will let you purchase them.

Despite the current scrutiny of inverse and leveraged ETFs, I firmly believe that inverse ETFs are the “safest” way for traders and investors to gain inverse exposure to various market segments. Just be sure you understand what you are buying.

Disclosure: I do not have any positions in any of the securities mentioned. I have been using leveraged and inverse funds that employ a “daily reset” since 1994, and they have always performed as stated in the prospectus.