TBT ETF is a short for ProShares UltraShort 20+ Year Treasury exchange traded fund that allows investors to benefit as soon as long treasury interest rates happen to rise. Prior to deduction of fees, expenses and the interest income that is earned on financial and cash instruments, TBT ETF seeks investment results on a daily basis, which corresponds to twice, or 200%, the inverse of the day-to-day performance by the Barclays Capital 20+ Year US Treasury Index. The structure of TBT ETF imposes certain limitations on its usefulness by investors who are looking for long-term options. Relatively higher expenses and time decay options also contribute to possible tracking errors.
The Barclays Capital 20+ Year U.S. Treasury Index (formerly Lehman Brothers) also includes most publicly issued US Treasury securities, which usually have more than 20 years of their remaining maturity period, have US dollars denomination, are not convertible, have fixed rates, are investment grade rated (BBB- by S&P or Baa3 by Moody’s Investment Service), and have a par outstanding of over $250. Weightings of the Index are done by the comparative market value for all securities which meet the criteria for the Index. Excluded from this Index are some special issues, such as State and Local Government Series Bonds (SLGs), U.S. Treasury inflation protected securities (TIPs), Targeted Investor Notes (TINs), Flower Bonds, as well as coupon issues which have been removed from the assets that are already included. From its inception to the close of 2008, the daily change correlation of TBT ETF with iShares Lehman 20 Year Treasury Bond Fund (TLT) works out as -0.98.
Creation and Redemption of Creation Units
The ETF issues as well as redeems the shares in a continuous cycle at their respective Net Asset Value, or NAV, in relative large and specified numbers, generally known as Creation Units. The intention of this mechanism is to especially prevent discounts or large premiums from its net asset Value. Principally Creation Units related to Ultra ProShares are both issued as well as redeemed in kind for securities that are included in the concerned underlying index, as well as a cash amount. Except if aggregated as Creation Units, the shares will not be considered as redeemable securities for the fund. As such, retail investors can neither purchase nor redeem any share directly with or from this fund. On the contrary, many retail investors can only either sell or purchase shares from secondary market.
Volatility and Interest Rate Risk
The fluctuation in value of some financial instrument and debt securities, due to various changes in the existing interest rate, is known as the Interest rate risk. As a general rule, it has been observed that the value of securities that have longer maturity periods are considerably more prone to fluctuation as a result of changes in the interest rate, compared to securities that have relatively shorter maturity periods. Consequently, the leverage of TBT ETF automatically doubles the extreme volatility, at least by standards of the treasury market.
Should an investor wish to speculate with bond prices that are higher, but offer lower yields, he can invest in the available leveraged exchange traded fund products. However, such ETFs introduce much higher risks and should be left aside for more experienced traders.