The Hot Bernanke ETF Trade
Most weeks, ETF flows follow some sort of a pattern: Big funds gains assets, big funds lose assets. Then there are weeks like last week where one fund has a near-7,000 percent (not a typo) increase in assets, and we are left scratching our heads.
Last Wednesday, the little-followed, largely overlooked ProShares Ultra 7-10 Year Treasury ETF (NYSEArca: UST) went from $12 million in assets under management to more than $833 million overnight.
The increase in assets of more than almost 6,000 percent overnight was enough to catch our eyes on its own, but the fact that it accompanied a 53 percent increase in assets in a similar, multibillion-dollar ETF—the iShares Barclays 3-7 Year Treasury Bond Fund (NYSEArca: IEI)—really rang the alarm bells.
In the five days through last Thursday, there were more than $2.5 billion in net creations in the two funds, and on Friday, UST had added another $240 million in assets. In other words, someone is clearly making a huge bet on these two funds that target the middle of the Treasury curve.
The UST trade is especially aggressive, considering it is part of the “Ultra” line of products from ProShares, whose promised returns are equal to two times the daily return of the reference index.
In the case of U.S. Treasurys, that means whoever is responsible for these outsized inflows is not only betting hard on a further decline in yields in the 7- to 10-year pocket of the curve, but doing so with leverage.
That may help explain why that additional $240 million in assets came into the fund between Friday and Monday as the daily reset of the most leveraged funds requires an investor to “true-up” his or her exposure due to the “path-dependent” nature of levered fund returns.
Still, it’s hard to look at these two trades in isolation given the magnitude of these inflows. When two similar, albeit different, strategies see such massive inflows, it is hard not to point fingers at institutional investors.
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