ETFs For Higher Rates And Inflation

To put this in perspective, consider the post-election backup in the 30-year Treasury bond rate. Over the first two weeks in November, it rose 41 basis points (0.41 percent) while TBF’s share price climbed 7.3 percent.

You can get virtually the same exposure as TBF through the Direxion Daily 20+ Year Treasury Bear 1x Shares ETF (NYSE Arca: TYBS) for half the price. That word “virtually” is important. TBF and TYBS may track the same index, but they do so in decidedly different ways. TBF uses a portfolio of five index futures and swaps while TYBS relies upon a single ETF swap. This, plus different index switchover dates, accounts for their disparate performance.

If you’re chary of volatility, you could slide down the yield curve a bit with the Sit Rising Rate ETF (NYSE Arca: RISE), an actively managed portfolio that aims to capitalize on rising interest rates by taking short positions in 2-, 5- and 10-year Treasury note futures. RISE managers set an explicit duration target of -10 years, making this fund a precise hedging tool. Duration for TBF and TYBS, apart from being longer, is variable. RISE is structured as a commodity pool, which means investors receive a K-1 partnership return at tax time rather than the Form 1099 received by holders of TYBS and TBF.


Treasury Inflation-Protected Securities (TIPS), an innovation that hasn’t really had an inflationary cycle work out yet, provide investors an opportunity for both rising income and capital gains. If inflation climbs, so too do TIPS coupon payments and the principal amount received at maturity.

Focused on long-dated TIPS, the PIMCO 15+ Year U.S. TIPS Fund (Nasdaq: LTPZ) is a narrowly constructed portfolio with just eight holdings, but offers real bang for the buck if you can stand the volatility. A stablemate with much shorter duration is the PIMCO Broad U.S. TIPS Fund (Nasdaq: TIPZ), whose 19 issues have at least one year to maturity. 

Cheaper and broader exposure to shorter-term TIPS is available through the Schwab U.S. TIPs ETF (NYSE Arca: SCHP). With SCHP, you get a 47-issue portfolio for just 7 basis points.

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DisclosureBrad Zigler pens's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) ...

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