Top 10 Leveraged Bond ETFs

NEW YORK ( ETF Digest) -- With inflation pressures either rising or falling -- and with the dollar in decline -- it's important to have portfolio protection for fixed-income portfolios. A more aggressive way to do this is through leveraged fixed-income long or short ETFs. More conservative investors will find inverse bond issues more to their liking.

If for any reason interest rates should suddenly experience a sharp move higher, leveraged short ETFs allow fixed-income investors a way to hedge their exposure and catch up with fast-moving markets.

This sector nevertheless is most suited to speculators since, even with the leverage employed, it still may be less than with trading alternatives like options or futures. Once again these exist for speculators primarily to use in a tactical manner most likely.

Given accommodative monetary policies across the globe, it may seem untimely to hedge or short bonds. In fact, recently the U.S. Fed has stated they'll keep interest rates low beyond 2013 perhaps making the use of these products untimely. But, down the road it's helpful to have these products available when you need them.

In fact, as you review bearish inverse and leveraged issues, you'll note some interesting and perhaps counter-intuitive conditions. Most of the AUM (Assets under Management) is concentrated in bearish issues while most of the positive results are in the bullish issues. Why is this? Primarily, large institutions and retail investors' make-up what's often referred to as the "bond vigilantes" or "bond police." These consist of investors in the open market who can and have in the past force changes in Fed policies through their investment activity. Therefore, even though Fed policy may state a low interest rate policy, or ZIRP (Zero Interest Rate Policy) as is presently the case, investors may choose to act in a manner opposite. In other words, they don't believe current policies are valid and wish to bet against them. That said, betting against Fed and other central bank policies have been a speculator's graveyard. You can see this in the performance results of various bearish ETFs listed below.  

Understanding how leveraged issues operate and perform is another issue facing investors. Firstly, volatility in interest rate instruments and compounding features may, and have, negatively affected how these products may track respective indexes. Therefore, sometimes without careful management of your positions these products may not deliver what you would normally expect. This makes timing and technical analysis all the more important as to when to use these products or not .

We're not ranking these ETFs favoring one over another so don't let the listing order mislead you. Although we may use some of these in ETF Digest portfolios it's not our intention to recommend one over another.

Whereas our previous technical analysis methodology involved using evaluating monthly charts making timing more easily evaluated, inverse issues require greater attention and this involves shorter-term views. Making these tactical decisions then shortens our view to weekly charts augmented by daily chart views and analysis.  In our view it pays to be active and utilize a more proactive risk management approach.

To determine positions, it is often most useful to track the relevant indices and/or conventional ETFs to which these leveraged products are linked versus these issues themselves. Often erratic behavior of the leveraged issues can alter what might ordinarily be the right position.

One little known fact is often it's better to short the bullish ETF versus going long the bearish issue. This is because the opposing issue can deteriorate faster than opposite issue. Many retail investors are unable to do this other than through some complex options strategies for example.

Finally, investors must take into account the low AUM for some issues and question whether as a business model for the sponsor, they will continue to exist. For example, recently Direxion Shares closed leveraged short and long short-term Treasury issues due to low AUM and trading activity. Investors must remain alert to these potential events.