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Bear, Bull Treasury ETFs Require Caution

Stocks in this article: TWOL TWOZ

The following commentary about new bear and bull leveraged Treasury ETFs is from Dave Fry, founder and publisher of ETF Digest and author of the Dave's Daily column on ETFs.

Leveraged ETF provider Direxion recently issued bull and bear funds to correspond with the daily price changes in two-year U.S. Treasury notes.

The two new leveraged ETFs are the Daily 2-year Treasury Bull 3x Shares (TWOL) and the Daily 2-year Treasury Bear 3x Shares (TWOZ).

These funds represent an important development, particularly for investors who believe interest rates could rise or fall dramatically and wish to prosper by sharp changes in the yield curve. For example, in a rising interest rate environment the yield curve may invert whereby short-term interest rates may exceed long-term rates. A steepening yield curve would produce the opposite result.

Short-term Treasury securities yields may change dramatically but due to their short duration, prices would change less than on securities with a longer duration such as those bonds with maturities of 10-30 years.

Therefore, if one wished to profit by a steep rise or fall in short-term interest rates the leverage afforded by these new leveraged issues offers such an opportunity. Alternatives would only include futures and/or options markets where leverage may be more than the leverage on these ETFs.

Given their more intensive trading nature fees on these issues are much higher (.95%) than conventional non-leveraged issues.

As with other leveraged issues with daily resets, tracking beyond a few days may not match the index or investor expectations.

Another fact for investors is the newness of these issues and a lack of trading volume. This in itself can lead to poor executions, as investors should wait for volume and liquidity to build. Should that happen and the yield curve change, especially on the short-end of the curve, these securities may provide an effective hedge for those seeking interest rate protection and speculative opportunities.

We advise investors use caution and a disciplined approach when utilizing these securities.

Disclosure: No position in these securities.

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