What You Need To Know About Rising Rate ETFs

Just when you thought all of the rising rate chatter from 2013 was but a distant memory, the investment community is once again dredging up strategies to shelter your portfolio from the ticking time bomb known as your bond funds.

Ok, that last part was a little dramatic. Yet, that’s how the media and many opportunistic experts have positioned their message as we stare into the abyss of the most important Fed decision in the history of human kind.

Whether it happens in September, December, of sometime in 2016, we are more than likely going to experience some kind of interest rate hike by the Federal Reserve in the next 12-months. That event has many fixed-income experts on edge as worries over bond market liquidity and interest rate volatility threaten to change the landscape that we have become accustomed to over the last half decade.

How Rising Rate ETFs Work

I’m sure by now you have read some kind of article about how you need to own a rising rate mutual fund or ETF to fend off the madness of skyrocketing Treasury yields. Examples such as the ProShares Short 20+ Treasury Bond ETF (TBF) and ProShares Short 7-10 Year Treasury Bond ETF (TBX) are two well-known single beta ETFs in the category.

TBF and TBX are designed to track the inverse daily price movement of a basket of long and intermediate-duration Treasury bonds, respectively. These funds are essentially designed to be used as a directional bet on U.S. interest rates. In that respect, they can also be implemented as a hedge or shock absorber to dampen the impact of traditional interest-rate sensitive bond exposure in your portfolio.

If you are really aggressive, you may be urged to choose a leveraged index such as the ProShares UltraShort 20+ Treasury Bond ETF (TBT). This ETF has over $3 billion in total assets dedicated to tracking 2x the inverse daily price movement of a basket of long-duration Treasury bonds.  Remember that leverage magnifies the price movement of an ETF in BOTH directions.  Novices beware.

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FMD Capital Management, its executives, and/or its clients may hold positions in the ETFs, mutual funds or any investment asset mentioned in this post. ...

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