Investors in levered short treasury ETFs may be setting themselves up for disaster (Pt2)

Most of the AUM allocated to levered short treasury ETFs is in TBT equity There is $7.4BN in AUM allocated to levered short ETFs of which $6.4 BN is allocated to the ticker TBT (Proshares Ultrashort 20+ Yr ETF). This ETF’s underlying is the Barclays’ 20 Yr Bond Index, whose historical chart is shown below. The next chart shows two hypothetical paths that the underlying follows from now to 6 months into the future. Which of the two paths do you think leads to a positive payoff from buying the 2x short levered ETF and holding it for the entire duration? The answer is neither. In Path #1, the underlying returns -3.5% over the time horizon, but a 2x levered


Investors in levered short treasury ETFs may be setting themselves up for disaster (Pt1)

Investors have shown significant interest in shorting treasuries recently. Some investors are choosing to express this view by buying levered ETFs that promise twice the inverse return of an underlying government bond index. Investors in these ETFs are holding them for longer than 1 day and are therefore, in addition to betting on the direction of the underlying, also making a complex bet on its path and realized volatility. In this article we examine some evidence that investors are behaving this way, and in the next article we examine the complex nature of the bet they are making. Investors in levered ETFs linked to treasuries are mostly short The chart below shows Assets Under Management (AUMs) in levered ETFs whose


ProShares Ultra S&P500 (SSO) performance simulator

Levered ETFs are sometimes misused Levered ETFs promise investors a multiple of the DAILY return of some underlying index and are only meant to be held for a day or less. However, there is clear evidence that investors are holding onto some of these ETFs (e.g TBT equity) for far longer than 1 day and thereby making a bet on the path and volatility of the underlying. To understand why this is the case, see our series that explains what drives the returns of an levered ETF if it is held past one day. What this simulator does The simulator helps demonstrate the complexity of these products if held past 1 day and how they can sometimes lead to extreme