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.

ProShares Short 20+ Year Treasury ETF (TBF)

TBF follows the Barclays Capital U.S. 20+ Year Treasury Index (-100%) which would be similar to shorting popular TLT (iShares U.S. Treasury 20+-year ETF). The fund was launched in August 2009. The expense ratio is .95%.  AUM (Assets under Management) equal $756 million shares and average daily trading volume is 442K shares. As of the end of February 2012 the YTD return is 3.42%. The one year return -29.72%.

iPath US Treasury Flattener ETN (FLAT)

FLAT follows the Barclays Capital U.S. Treasury 2-Year/10-Year Yield Curve Index (-100%) which employs a strategy that seeks to capture returns available from a steepening to flattening yield curve through a notional investment in Treasury futures contracts. This is a complex strategy perhaps more suitable to institutional investors. The fund was launched in August 2010. The expense ratio is .75%. AUM is $49 million and averaged daily trading volume is 16K shares. As of the end of February 2012 the YTD return was -.34%. The one year return was 28.65%.

iPath U.S. Treasury 10 year Bear ETN (DTYS)

DTYS follows the Barclays Capital 10-Year U.S. Treasury Targeted Exposure Index (-100%) which seeks to produce returns that track movements in response to an increase or decrease, as applicable, in the yields available to investors purchasing 10-year Treasury bonds. The fund was launched in August 2010. The expense ratio is .75%. AUM equal $78 million and average daily trading volume is 40K shares. As of the end of February 2012 the YTD return was 1.58%. The one year return was -40.29%.

ProShares Short High Yield Bond ETF (SJB)

SJB follows the iBoxx Liquid High yield Index at (-100%) which is designed to be a broad representation of the U.S. dollar denominated high yield liquid corporate bond. An investor could pair this with a conventional long ETF like HYG (iShares iBoxx High Yield ETF). The fund was launched in March 2011. The expense ratio is .95%. AUM equal $36 million and average daily trading volume is 58K shares. As of the end of February 2012 the YTD return was -2.24%. The one year return was unavailable.

iPath US Treasury Long Bond Bear ETN (DLBS)

DLBS follows the Barclays Capital Long Bond Futures Targeted Exposure Index (-100%) which means that it follows the long dated Treasury bonds inversely. We would compare and track it to the movements in the 30-year Treasury bond contract. The fund was launched in August 2010. The expense ratio is .75%. AUM equal $22 million and average daily trading volume is 19K shares. As of the end of February 2012 the YTD return was 6.98%. The one year return was -38.91%.

iPath US Treasury 2-year Inverse Bond ETN (DTUS)

DTUS follows the Barclays Capital 2-year U.S. Treasury Futures Targeted Exposure Index (-100%) which means the fund should perform the opposite of 2-year Treasury Notes. We sometimes would compare it inversely with SHY (iShares 2-year Treasury ETF). The fund was launched in August 2010. The expense ratio is .75%. AUM is $18 million and average daily trading volume is less than 2K shares. As of the end of February 2012 the YTD return was .60%. The one year return was -16.81%.

ProShares Short 7-10 Year Treasury Bond ETF (TBX)

TBX follows the Barclays Capital U.S. 7-10 year Treasury Index (-100%) which measure the performance of the U.S. Treasury bonds with maturities greater than 7 years but less than 10 years. It is comparable to IEF (iShares 7-10 Year Treasury ETF). The fund was launched in April 2011. The expense ratio is .95%. AUM management equal $19 million and average daily trading volume is 4K shares. As of the end of February 2012 the YTD return was .20%. The one year return was unavailable.

DirexionShares Daily Total Bond Market Bear 1 x ETF (SAGG)

SAGG follows the Barclays Capital U.S. Aggregate Bond Index (-100%) and is a measure of the total U.S. investment grade bond market. It would logically follow the inverse performance of AGG (iShares U.S. Aggregate Bond ETF). The fund was launched in March 2011. The expense ratio is .95%. AUM equal $19 million and average daily trading volume is 17K shares. As of the end of February 2012 the YTD return was -.14%. The one year return was unavailable.

iPath U.S. Treasury 5-year Bear ETN (DFVS)

DFVS follows the Barclays Capital 5-year US Treasury Futures Targeted Exposure Index (-100%) which follows the inverse price movement of the 5-year Treasury futures contract. The fund was launched in July 2011. The expense ratio is .75%. AUM equal $1.3 million and average daily trading volume is only 1K shares. As of the end of February 2012 the YTD return was -.66%. The one year return was unavailable.

ProShares Short Investment Grade Corporate Bond ETF (IGS)

IGS follows the inverse price movement of the iBoxx Liquid Investment Grade Index (-100%) which would be comparable to the inverse price movements of LQD (iShares Liquid Investment Grade Index). The index consists of investment grade corporate bonds. The fund was launched in March 2011. AUM is less than $4 million and average daily trading volume is less than 3K shares As of the end of February 2012 the YTD return was -3.29%. The one year return was unavailable.

DirexionShares NYSE 7-10 year Bear Treasury ETF (TYNS)

TYNS follows the index of the same name. It would be competitive with TBX (ProShares 7-10 year Inverse Treasury ETF) and compatible with IEF (iShares Lehman 7-10 Year Treasury ETF) for tracking purposes. The fund was launched in March 2011. The expense ratio is .95%. AUM equals $3.4 million and average daily trading volume is less than 1K shares. As of late February 2012 the YTD return was .96%. The one year return was unavailable.

DirexionShares NYSE 20 year + Bear ETF (TYBS)

TYBS follows the index of the same name. It would be competitive with TBF (ProShares 20 + Year Inverse Treasury ETF) and compatible with TLT (iShares Lehman 7-10 Year Treasury ETF) for tracking purposes. The fund was launched in March 2011. The expense ratio is .95%. AUM equal $3 million and average daily trading volume is less than 1K shares. As of late February 2012 the YTD return was -1.13%. The one year return was unavailable.

Since interest rate and monetary policies globally have been so accommodative it hasn't been very prudent or effective to use inverse bond products. This is why many inverse bond ETFs have so few assets under management and trading is light.

Demographics in the developed world show aging populations seeking a more conservative mix of high yielding assets. This is particularly true in the fixed income sector even though low interest rates have been with us for nearly a decade. Eventually this low interest rate environment will end. When it does is anyone's guess but it's comforting to have these tools available to protect portfolios from sharp declines.

For further information about portfolio structures using this or other ETFs see ETF Digest.

The ETF Digest has no current positions in any of the ETPs featured in this review.

You may address any feedback to: feedback@etfdigest.com   

(Source for holding data is from ETF Database and from various sponsors.)

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

More from ETFs

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

Video: Why Shark Tank Star Kevin O'Leary Is Doubling Down on Internet Stocks

Video: Why Shark Tank Star Kevin O'Leary Is Doubling Down on Internet Stocks

Simple Investing Strategies Stand the Test of Time

Simple Investing Strategies Stand the Test of Time

This Technology ETF Could Be Signaling a Looming Tech Stock Rout

This Technology ETF Could Be Signaling a Looming Tech Stock Rout

The End of Retailpocolypse? This Retail ETF Is Soaring

The End of Retailpocolypse? This Retail ETF Is Soaring