PROSHARES SHORT 20+ YEAR TREASURY (TBF)
Thomas Hepner
Portfolio Performance and Interest Rates
• Our portfolio is very correlated with overall performance of stock
market
• Interest rates have been increasing
• Generally, stock market appreciates when interest rates decline, and
depreciates when interest rates rise
• This is due to spread between returns of stocks and treasury bonds
(risk-free rate)
Effects of Rising Interest Rates on Portfolio
• HTA hemorrhaging value – down over 10%
• HTA exposed to health care, real estate, and interest rate risk
• HTA has huge upswing from Obamacare, but is being crushed by
rising rates
• I expect HTA to fluctuate in value like it has during the year from Fed
announcements with a long term trend downwards until Obamacare is
fully implemented
Hedging Against Interest Rate Risk
• Hedge by betting that interest rates will rise
• How do we do this?
• Buy an asset that gains in value as interest rates rise and bond prices
fall
- Interest Rate Option (can’t purchase this)
- Inverse Treasury ETFs
Principles of Inverse Treasury ETFs
• “The longer the duration of the bond ETF, the more the ETF will rise
or fall in value when interest rates change.”
• “Changes in Treasury bond prices often do not lead to a proportional
move in corporate bond prices.”
• “Leveraged ETFs sometimes do a terrible job tracking moves of the
underlying investment.”
• Reference:
http://www.forbes.com/sites/marcprosser/2012/03/19/using-etfs-to-short-thetreasury-market-read-this-first/
Inverse Treasury ETFs to Choose From
• ProShares Short 20+ Year Treasury (TBF)
• ProShares UltraShort 20+ Year Treasury ETF (TBT)
• Direxion Daily 20+ Year Treasury Bear 3x ETF (TMV)
• Direxion Daily 20+ Treasury Bear 1 X Shares (TYBS)
• ProShares Short 7-10 Year Treasury (TBX)
• ProShares Short High Yield (SJB)
• http://www.investopedia.com/stock-analysis/2013/the-top-
5-inverse-bond-etfs-tbf-tbx-tmv-sjb-jgbs0204.aspx
What criteria to choose from?
• Expense Ratio
• ETF with high duration to capture value
• Do not want ultra short ETF because of decay over time
• Moves roughly opposite of HTA
• ProShares Short 20+ Year Treasury (TBF)
• Direxion Daily 20+ Treasury Bear 1 X Shares (TYBS)
Performance Comparison – Last 2 Years
• Very highly correlated with each other
Comparison with HTA – 1 Year
• Inversely correlated with HTA
Other Metrics
• ProShares Short 20+ Year Treasury (TBF)
• Direxion Daily 20+ Treasury Bear 1 X Shares (TYBS)
• Average Volume: TBF (995,000), TYBS (4,185)
• YTD Returns: TBF (9%), TYBS (10.9%)
• I recommend TBF for liquidity considerations.
Why buy now?
• Interest rates at historical low
• Yellen will replace Bernanke as Fed Chairman
• Fed tapering - on and off (eventually they will do it)
• Tapering will result in rises in interest rates
Summary
• HTA hemorrhaging value because of interest rates
• HTA still provides 5% yield and potential for long-term
appreciation, especially from Obamacare implementation
• Buying Inverse Treasury ETF, TBF, provides strong profit
potential should interest rates rise