Friday, November 13, 2015

Sirens Are Sounding for the Best ETF Trade Ever

From Bloomberg:
Here we go again.

Interest in the most popular exchange-traded fund that's used to bet on increasing U.S. interest rates is rising again as investors speculate that the Federal Reserve may embark, as early as next month, on its first hiking cycle in almost a decade.

The ProShares UltraShort 20+ Year Treasury (TBT), which uses derivatives to provide twice the opposite of the daily performance of 20-year U.S. Treasury bonds, has become the way many investors bet on rising rates. TBT has a 94 percent correlation to U.S. Treasury yields. In short, if yields go up, as they would be expected to in a rising rate environment, TBT would go up by double.

This seductive dynamic is also why no ETF has incinerated more investor cash than the ProShares UltraShort 20+ Year Treasury, which has seen nearly $10 billion worth of inflows in its life but has only $2.8 billion to show for it today. Like the Sirens from Homer’s Odyssey, TBT has lured countless investors with its sweet song of huge profits when interest rates rise, only to dash them against the rocks repeatedly as rising interest rates failed to materialize.

This interest rate fake-out is why you see the rare chart like the one below, which shows TBT’s minus 84 percent performance (in the top half) as well as its consistent quarterly inflows (in the bottom half). This rare phenomenon of an ETF obliterating cash can also be found in exchange-traded products tracking gold miners, the VIX, natural gas, and Russia, albeit on a smaller scale...MORE
We've written about the TBT in relation to Doug Kass' horrific calls:
Do note: since that chart was posted the sponsor had to do a freakin' 1:4 reverse split when the thing went into single digits! Today's $45.55 close is $11.14 on the old basis.
I get a bit grumpy when so-called professionals can't admit they are wrong and just pretend nothing happened. Here was my followup to the post linked above:

It Looks Like Long-term Bonds Are Finally Rolling Over (will Doug Kass be saved from his worst trade ever?) TLT; TBT
On August 2nd we poked some gentle fun at Doug Kass who has been calling the top in bonds since February 2010 when the short was a "Once in a generation opportunity". (TBT $47.98).

Using Mr. Kass' preferred vehicle, the ProShares UltraShort 20+ Year Treasury (TBT), you would have lost 69% of your money but been heartened by Mr. Kass' cheers all the way down: "Trade of the decade" ($32.27), "All in on TBT" ($19.60), "Balls to the wall short" ($18.08) and another "Trade of the decade" at $14.90 on July 30th.

The TBT is trading at $15.47 today and Kass may be vindicated.
I should have felt the hubris when I posted on the 2nd, the long-term bond etf had topped at $131.94 a week before, on July 25th.

Here's the action from Slope of Hope:...