Short and Short-Term Bond ETFs: Defense Against a Bursting Bubble

 |  Includes: PST, SHY, SMMU, TBF, TBT, TMV, TUZ, TYO
by: Tom Lydon

There’s been a lot of talk about the so-called “bond bubble,” spurred by the rush of investor cash into Treasury bond ETFs. Bubble or no bubble, here’s one way to cope.

Interest rates have been at record lows for more than a year, and as long as the economy is down, they could be staying that way. Sooner or later, though, the Federal Reserve will raise them. When that happens, bond prices will fall and yields will rise, leaving the trillions in them at risk.

The good news is that the central bank has shown virtually no interest in raising rates for the time being. The bad news is that they can’t stay this way forever. Don’t get caught holding the bag.

One way to cope with the impending rate hike is to look at short-term bond funds. Long-term bonds will be hit the hardest, so you may want to steer clear if you feel a rate hike is imminent.

  • PIMCO 1-3 Year U.S. Treasury Index (NYSEARCA:TUZ)
  • PIMCO Short-Term Municipal Bond Strategy (NYSEARCA:SMMU)
  • iShares Barclays 1-3 Year Treasury (NYSEARCA:SHY)

Another way to cope is by using ETFs that give short exposure to long Treasuries. These funds are designed to move up as Treasury prices decline. As luck would have it, your options are plentiful:

  • ProShares Short 20+ Year Treasury (NYSEARCA:TBF)
  • ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT)
  • ProShares UltraShort 7-10 Year Treasury (NYSEARCA:PST)
  • Direxion Daily 10-Year Treasury Bear 3x Shares (NYSEARCA:TYO)
  • Dirextion Daily 30Year Treasury Bear 3x Shares (NYSEARCA:TMV)

Direxion’s and ProShares‘ funds are designed to move inversely to the underlying index by 100%, 200% or 300% on a daily basis. Leveraged and inverse ETFs are not designed for buy-and-hold use because compounding causes them to stray from their benchmarks over time. This effect isn’t always negative, and it’s heightened in volatile markets. To understand how it all works, read our special report.

Visit the ETF Analyzer for more details on short bond ETFs. You can sort by assets, performance, name and more.

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Disclosure: Tom Lydon’s clients own shares of SHY.