3 Inverse ETFs To Buy Now – TTT, EDZ, DRV
As I’m sure you know, Fed Chairman Bernanke released the FOMC statement on Wednesday.
He laid out the Fed’s plan to taper off asset purchases and begin to raise interest rates. He believes the Fed will begin to taper asset purchases when the unemployment rate falls to 7% by the end of the year and begin to raise interest rates by the middle of next year when unemployment reaches 6.5%.
Unfortunately, investors didn’t like what he had to say.
As soon as he uttered those words, investors immediately began selling assets across the board. Stocks, bonds, commodities, and foreign currencies were all sold in favor of holding US Dollars.
You see, the end of QE is in sight. And even though the tapering won’t begin for a while, investors can’t wait around for the tapering to begin. They’re front running the Fed’s moves.
In essence, the two markets the Fed has been manipulating lower with their asset purchases – Treasuries and Mortgage Backed Securities – are rapidly going from artificially low to market priced.
Interest rates on the Treasuries and mortgages have already soared to their highest levels in years. This jarring dislocation of the bond market has widespread and negative implications for asset prices and the global economy.
In short, interest rates are rising too rapidly. And they’re quickly approaching a level that will curtail economic growth. This is the Fed’s worst nightmare.
Unfortunately there’s no way for the Fed, or anyone else, to wake up from this Fed induced zombie apocalypse in time to stave an economic downturn. So buckle up, we’re in for a bumpy ride.
Luckily, some ETFs are designed to profit when the index it tracks falls in value. These ETFs are called inverse ETFs. They’re designed to move in the opposite direction as the index.
Here are three inverse ETFs that investors can use to profit from the coming downturn.
ProShares UltraPro Short 20+ Year Treasury (TTT)
TTT tracks an index of all U.S. Treasury securities that have a remaining maturity greater than 20 years.
The investment seeks daily investment results that correspond to three times the inverse of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.
In order to do this, the fund invests in derivatives that ProShare Advisors believe, in combination, should have similar daily return characteristics as three times the inverse of the daily return of the index.
Here’s the thing…
Treasury prices have soared as investors scramble to front run the Fed. But the move is far from over. TTT should continue to rack up gains as the bond market adjusts to a new reality without the Fed’s asset purchases.
Direxion Daily Emerging Markets Bear 3x Shares (EDZ)
EDZ seeks daily investment results of 300% of the inverse of the performance of the MSCI Emerging Markets Index.
The fund creates short positions by investing at least 80% of its net assets in financial instruments that, in combination, provide leveraged and unleveraged exposure to the index.
What’s wrong with emerging markets?
According to the World Bank, monetary tightening in developed economies could crimp growth in emerging markets as interest rates rise. It could lower economic output in some countries by as much as 12%!
Direxion Daily Real Estate Bear 3x Shares (DRV)
DRV seeks daily investment results of 300% of the inverse of the performance of the MSCI US REIT Index.
The index is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations.
Equity REITs that own buildings and earn income from rents take a direct hit from rising interest rates. The higher rates go, the higher their borrowing costs climb and that cuts into profits.
The dislocation of interest rates is also jarring for mortgage REITs that make money by borrowing at low short term rates and investing at higher long term mortgage rates.
They make money by capturing the spread between the short term and long term rates.
Obviously when short term rates go up, it shrinks the spread and makes them less profitable.
Here’s the upshot…
The Fed’s overly optimistic outlook has essentially ended the impact of QE today. It’s causing interest rates to rise much too high too fast. Even the Fed will admit the economy will be derailed by market level interest rates.
You can use inverse ETFs like TTT, EDZ, and DRV to profit as interest rates soar and interest rate sensitive indices fall.
Good Investing,
Corey Williams
Category: ETFs, Inverse ETFs, Leveraged ETFs
