The recent speculation that the Federal Reserve may increase U.S. interest rates may be the reason one popular exchange traded fund ETF is on the rise. Since the Federal Reserves press release on Oct 28 ProSHares Ultra Short 20+ Year Treasury (TBT) is up 8%.
According to InvestmentNews, TBT uses derivatives to provide twice the opposite of the daily performance of 20-year Treasury bonds with a 94% correlation to Treasury yields. When yields go up, TBT goes up by double. The potential for huge returns makes it easy to understand why many investors are attracted to TBT despite its track record.
In its lifetime, TBT has seen nearly $10 billion worth of inflows but has only $2.8 billion to show for it according to reports from InvestmentNews.
The lure of high returns is not the only reason TBT has become one of the largest ETFs in the U.S. According to InvestmentNews, many money managers use TBT as a duration killer for the portfolio. TBT’s duration is -19 years. Adding TBT to a portfolio can potentially lower the portfolios overall interest rate risk without having to reduce bond positions, which typically have a longer positive duration.
Regardless of its uses and potential returns, TBT is a leveraged ETF and with that comes significant risk. In order to meet their objectives, leveraged ETF’s use a number of investment strategies, such as swaps, futures contracts and other derivative instruments, to meet their objectives. Unfortunately the complexities associated with these product are not only misunderstood by many investors, but the brokers that sell them.
Brokers have a responsibility to perform adequate due diligence in order to determine suitable investment recommendations. Recommendations should be inline with the clients risk tolerance, investment objectives, liquidity needs and investment experience. Brokers that make unsuitable investment recommendations may be liable for investment losses.
If you invested in ProSHares Ultra Short 20+ Year Treasury or another leveraged ETF and would like to speak to a securities attorney about your potential to recover your investment losses through FINRA arbitration, please call our Chicago office at (312)238-9650 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Vero Beach, Florida.