Hedgers, Contrarians Piled Into TBT In August

September 07, 2010

Bond investors scooped up TBT last month, in a sign some may think the Treasurys rally is growing long in the tooth.

As exchange-traded fund investors dumped developed-market equities last month and ran for cover in the fixed-income and gold markets, they also piled into a popular ETF that allows them to profit from price declines in long-dated Treasurys, a reflection of bearish bets and hedging.

The ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) was the fifth-most-popular U.S. ETF in August, hauling in $585.2 million in net new money and bringing its total assets to $4.23 billion. TBT, the world’s most popular leveraged and inverse fund, gives investors double the inverse of its index’s daily returns and is typically used by more sophisticated traders who grasp the nuances of daily rebalancing.

While TBT has lost almost 29 percent this year, the fund was the single most popular fixed-income ETF last month, a sure sign that investors are growing skeptical of the powerful rally in Treasurys since problems in the eurozone began to derail hopes of global economic recovery. The iShares Barclays 20+ Year Treasury Bond ETF (NYSEArca: TLT), which offers straight exposure, is up 15 percent this year.

“I think [TBT’s popularity] is a bit of hedging and betting against Treasurys, because the idea of going short the long bond has been popular for a while,” said Paul Weisbruch, an ETF trader at King of Prussia, Pa.-based Street One Financial. “It doesn’t really surprise me much,” he said about TBT’s prominent position on IndexUniverse.com’s creations list last month.

He noted that while the daily rebalancing of an ETF such as TBT requires vigilance on the part of its owners because it can cause returns to significantly deviate from the underlying index, it’s probably a less demanding way to express a bearish market view on Treasurys than, say, buying puts in TLT on an ongoing basis.

Two other "short" long-dated Treasurys funds that got traction in August were the ProShares Short 20+ Year Treasury ETF (NYSEArca: TBF), which offers the simple inverse of its index and the triple-leveraged Direxion Shares 3X 30-Year Treasury Bear ETF (NYSEArca: TMV), data compiled by IndexUniverse.com show. TBF attracted $50.7 million in August, bringing its assets to $450.8 million, while TMV added about 35 percent, swelling to $163.6 million, providing more signs that investors grew wary last month of the run-up in Treasury's prices or at least were preparing for some kind of reversal.

Getting Out Of TLT

The biggest-losing funds in August were
large-cap equities funds, including the SPDR S&P 500 ETF (NYSEArca: SPY), which topped the list with $6.63 billion in net outflows. Total assets for the world’s biggest ETF fell to $62.24 billion from $72.04 billion at the end of July.

The PowerShares QQQ ETF (NasdaqGM: QQQQ) of Nasdaq’s biggest companies suffered $2.08 billion in redemptions, and investors pulled $1.79 billion out of the small-cap iShares Russell 2000 ETF (NYSEArca: IWM).

But TLT itself was sixth on IndexUniverse.com’s redemptions list, suggesting some investors are content to take profits before what some are calling a bubble in bonds bursts. The ETF suffered $426.5 million in net outflows, bringing total assets to $3.19 billion.

“Prices have been going higher and yields are going to rock-bottom lows, so some are saying it might be a good time to get out,” said Weisbruch.

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