ProShares Launches Short Treasury ETFs

by: Eric Dutram

Investors have taken up an increasingly bearish outlook toward fixed income in recent months, as inflationary pressures continue to build and an ongoing economic recovery has increased the likelihood of rate hikes before the end of 2011. The last several weeks have seen ETF issuers roll out a number of products designed to offer inverse exposure to bonds - funds that could perform well if fixed income investments struggle in coming months.

ProShares has rolled out the first ETFs offering daily inverse exposure to junk bonds and investment grade corporates recently, and this week it continued building out the fixed income segment of the ETF lineup with two more products focusing on short exposure to Treasuries. The two new ProShares ETFs that began trading on Thursday include:

  • Short 7-10 Year Treasury ETF (NYSEARCA:TBX): This fund seeks to track the inverse return of the Barclays Capital 7-10 Year U.S. Treasury Bond Index. The underlying index consists of U.S. Treasury securities that have a remaining maturity of between seven and 10 years and are rated investment grade. The fund will have an expense ratio of 0.95%, in line with other ProShares products. This product could be appropriate for investors looking for a fund that offers short exposure but is more conservative both in its application of leverage and in terms of its interest rate sensitivity than some of the other products on the market.
  • UltraShort 3-7 Year Treasury ETF (TBZ): This fund seeks to return to investors double the inverse of the Barclays Capital 3-7 Year Treasury Index while also charging a fee of 95 basis points a year. The index to which TBZ is linked focuses on intermediate term Treasuries, and strives to deliver leveraged results on a daily basis. TBZ is the first ProShares product to focus on 3-7 year Treasuries, joining existing ETFs offering -200% daily exposure to long-dated Treasuries (NYSEARCA:TBT), intermediate term Treasuries (NYSEARCA:PST) and TIPS (NYSEARCA:TPS).

Short Treasury Bond Lineup

According to our ETF Screener, there are currently 14 ETPs targeting the inverse bond market. The long-dated side of the curve, which consists of funds targeting securities that have more than 20 years until maturity, makes up the lion’s share of the assets in the space as TBT, TBF and TMV combine to haul in over $7.3 billion. However, investors are beginning to warm up the intermediate section of the curve as well, as these products tend to have lower levels of interest rate sensitivity and thus lower volatility.

ProShares already has an UltraShort (i.e., -200% daily leverage) fund targeting the intermediate term Treasury space in PST. TBX will serve as a less volatile counterpart to that offering. That fund has just under $475 million in assets under management and trades more than 200,000 shares a day. This suggests that there is sufficient demand in that slice of the interest rate curve. TBZ will be the only ETP in the leveraged inverse sub seven year space, offering investors -200% exposure to shorter-term bonds.

Disclosure: No positions at time of writing.

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