TMF Has Been Profitable During Equity Markets Corrections - Not In 2021-2022

Summary

  • All Treasury Bond ETFs are, on the average, negatively correlated to the US equities and are suitable as capital protection during market corrections.
  • TMF, a 3X leveraged 20+ Year Treasury Bond ETF was very profitable until 2020 but was underperforming in 2021-22.
  • BIL, the 1-3 month T-Bill ETF, is the recommended risk-off asset since August 2021.
  • Looking for a helping hand in the market? Members of Adaptive Momentum Investing get exclusive ideas and guidance to navigate any climate. Learn More »

Downtrend Arrow 3D

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Investment Thesis

In order to protect investment capital during equity market corrections, it is safe to liquidate the equity positions and to hold cash or US Treasury bonds. Since the Treasury bonds are, most of the time, inversely correlated to stocks, it is expected that bonds make gains when stocks sell off.

Over the last ten years the average correlations of Treasury Bond ETFs with SPY are shown in the following table.

Correlation

BIL

SHY

IEI

IEF

TLH

TLT

TYD

TMF

SPY

-0.18

-0.28

-0.31

-0.37

-0.38

-0.39

-0.40

-0.39

In principle, all these funds are useful for protection of capital during market corrections. The non-leveraged Treasury ETFs are commonly used in the composition of so-called "balanced funds" and also for portfolios with tactical asset allocation. In my previously published articles on Seeking Alpha I used them for portfolio risk protection.

The question I try to answer in this article is whether the leveraged Treasury ETFs, TYD and TMF, may be profitably used for the same purpose. I present simulation results for a very simple portfolio for a period of over seven years, from January 2015 to April 2022.

TMF and TYD

The Direxion Daily 20+ Year Treasury Bull 3X Shares (NYSEARCA:TMF) is available since April 2009. It currently yields 2.70% and has a net expense ratio of 1.06%.

The Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD) is also available since April 2009. It seldom pays any dividends (last distribution was in December 2020) and has a net expense ratio of 1.09%.

While TMF trades heavily at an average of over 3 million shares per day, TYD is less popular; its trade volume is about 20 k per day. Nevertheless, both are suitable for medium sized portfolios.

Simulations

A very simple portfolio invests during market risk-on periods in the top 2 ETFs from the following universe: DIA, QQQ, SPY, XLF, XRT. During risk-off periods, it invests all the funds in a single Treasury bond fund.

The summary performance of the portfolios is shown in the table below.

2015-22 NONLEV

CAGR

stdev

maxDD

Sharpe Ratio

Sortino Ratio

BIL

22.79%

13.18%

-10.59%

1.73

2.01

SHY

23.44%

13.20%

-10.59%

1.78

2.17

IEI

24.74%

13.33%

-10.59%

1.86

2.35

IEF

26.23%

13.68%

-11.18%

1.92

2.52

TLH

26.79%

14.71%

-13.41%

1.82

2.42

TLT

28.76%

16.33%

-16.23%

1.76

2.38

TYD

33.06%

18.20%

-18.25%

1.82

2.43

TMF

36.84%

31.31%

-43.82%

1.18

1.39

A quick look at the numbers reveals the following:

Largest CAGR: TMF 36.84%, Lowest volatility: BIL 13.18%, Lowest maxDD: BIL, SHY and IEI -10.59%, Largest Sharpe ratio: IEF 1.92, Largest Sortino Ratio: IEF 2.52

Overall, most investors would select IEF as their choice because it achieves the highest risk adjusted return, while getting a reasonably large return with negligible increase in volatility and draw downs.

Equity curves

Author

But, as we will show below, there are better choices for different periods of time. The table below shows the annual returns of the portfolios.

YEAR

BIL

SHY

IEI

IEF

TLH

TLT

TYD

TMF

2015

10.55%

10.82%

12.52%

14.16%

13.89%

16.69%

21.97%

25.44%

2016

9.94%

10.75%

12.64%

14.31%

15.10%

17.60%

25.37%

33.33%

2017

23.79%

23.75%

24.57%

25.98%

27.12%

30.67%

32.40%

44.73%

2018

14.38%

15.04%

15.42%

16.30%

16.28%

16.85%

20.01%

19.81%

2019

12.21%

13.24%

15.07%

17.98%

20.69%

25.35%

28.01%

50.78%

2020

51.74%

55.20%

59.44%

63.90%

70.98%

75.52%

87.93%

110.71%

2021

40.20%

39.80%

38.80%

36.97%

32.85%

30.01%

30.34%

10.40%

2022

-0.82%

-1.62%

-2.61%

-3.58%

-5.49%

-6.77%

-9.38%

-18.49%

Here are a few observations:

TMF was the best performing risk-off asset in 2015, 2016, 2017, 2019 and 2020. 2018 was a draw between TYD and TMF. BIL was the best in 2021 and 2022

Based on these observations, the "optimal" choice would have been to employ TMF as the risk-off asset in the period 2015- 20, and then switch to BIL for 2021-22.

Current Environment

Since August 2020 when all Treasury bond ETFs made a top, they all started a long-term downtrend. That downtrend has been relentless, having a single 4-month counter-trend during April - July 2021. Since August 2021, the downtrend has accelerated due to many contributing factors, chief among them being the change in the FED monetary policy.

A vivid illustration of the losses in Treasury bonds of all durations can be seen in the following chart. In three months and a half, TMF lost over 48% of its value.

TMF ETF Total returns

StockCharts

Conclusion

The current economic environment coupled with the so-called "Quantitative Tightening" and FED raising of FED fund rates, are expected to support the continuation of the current downtrend in the Treasury Bond prices.

My TMF rating is a SELL.

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This article was written by

Toma Hentea profile picture
2.29K Followers
Monitor market state (risk on/off) for successful investing
I am a retired professor of Electrical and Computer Engineering. Since 2011 I have been active in the AAII Chicago South Suburban chapter. My investment objective is to achieve high returns over the long run while allowing occasional downside corrections. Investment decisions are based on quantitative fundamental factors that take into account valuations, earnings growth and price momentum. Market exposure is varied in accordance to the state of leading US and global economic indicators. Options and leverage are used to enhance the performance of my investments.

Disclosure: I/we have a beneficial long position in the shares of TMV either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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