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TheStreet Open House

Top Inverse Bond ETFs

NEW YORK ( ETF Digest) -- With inflation pressures either rising or falling and with the dollar in decline, it's important to have protection for fixed-income portfolios despite current zero interest rate policies (ZIRP) . One lower risk way to do this is through inverse fixed-income ETFs as they offer a less complicated way to hedge for those investors who understand the risks involved.

It was only recently that the Fed stated it would keep its accommodative monetary policies in place, leaving interest rates low until 2014. At the moment this makes the use of inverse bond products untimely. Fed policies may change if economic conditions improve, but it's also possible that the bond vigilantes will force a change and drive bond prices lower in the open market by refusing to buy bonds at such low interest rates.

Whereas our usual technical methodology involves evaluating monthly charts, with inverse bond ETFs this approach would be inappropriate without featuring the basic linked issue as well as the index versus the inverse issue. It also doesn't make much sense to rank these issues given the different duration considerations and sectors (Treasury, Corporate, High Yield and so forth) listed. Further fundamental analysis, a change in Fed interest rate policies, and event risk can all be more important when dealing in this sector, and should all be factored in when making tactical decisions.

Don't be put off by low assets under management (AUM), light volume, and poor performance since these ETFs have struggled in a low interest rate environment. When they are needed, it is a positive to have these products available but investors should only use them when appropriate. Remember that inverse ETPs are not for everyone.

A final note of caution: some ETF sponsors may not be willing to maintain an ETF product over a long period with poor AUM given it would be a losing business proposition for them.

·         Understand how these issues operate. Volatility in interest rate instruments and compounding features may, and have, negatively affected how these issues might track respective indices and expected outcomes. Without careful management of your positions these products sometimes may not deliver what you would normally expect.

·         It is crucial investors monitor these issues against the conventional and paired long ETF and linked index to gauge their positions and manage them accordingly.

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