With just two months to go in 2022, the best-performing group of Exchange Traded Funds year-to-date may not be what you would have expected it to be when we started the year.
After a strong bull market rally coming off the march 2020 Covid-19 dip, most investors would have assumed stocks, mainly big technology stocks, would again be the market leaders in 2022.
However, the market never ceases to surprise, and as hindsight is always in 20-20 vision, it feels like we all should have seen the signs that 2022 wasn’t going to be a good year for stocks and another asset class was going to dominate.
Shorting longer-dated Treasury bonds has been, hands down, the best trade of 2022. Whether you use leveraged and-or inverse products or not, shorting Treasury Bills has produced great results in 2022.
For example, the ProShares UltraPro Short 20+ Year Treasury ETF (TTT) is up 176% year-to-date and more than 50% over the last three months. Direxion’s version of the same ETF, the Direxion Daily 20+ Year Treasury Bear 3X Shares ETF (TMV), is also up 176% year-to-date. The ProShares UltraShort 20+ Year Treasury ETF (TBT), which is a 2X leveraged inverse fund, is up more than 100% year-to-date.
Even the funds that short the shorter term Treasury bills, the 7-10 year term bills, like the Direxion Daily 7-10 Year Treasury Bear 3X Share ETF (TYO) and the ProShares UltraShort 7-10 Year Treasury ETF (PST) are up 66% and 42% respectively.
If you had run a screener at the beginning of the year for non-leveraged and non-inverse funds because the risk involved with those products are not necessarily in your comfort zone, you still could have bought the Simplify Interest Rate Hedge ETF (PFIX). PFIX holds over-the-counter interest rate options and US Treasury Inflation-Protected Securities or TIPS, and still produced a return of around 100% year-to-date.
So you may be asking how and why shorting longer-dated Treasury bills produce solid results when interest rates, Treasury bills, and bond yields are climbing higher. Well, it is a little complicated on the surface but pretty simple once you understand how it all works.
First, let us think about it this way. You have owned a 10-year Treasury bill for three years, paying you 2.5% interest. In this scenario, interest rates are lower than when you bought the bill; let’s say the current 10-year bill is paying 2.00%. Your Treasury bill would be worth more than a current bill because your bill is paying a…
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