Advisors can offer several options for clients. One of which is to do nothing. Clients could also reduce their exposure to fixed income or reduce exposure to interest rate volatility by moving to shorter-term maturities.
Another option to hedge against the bubble bursting is to go short on longer-term Treasurys with exchange-traded funds (ETFs).
There are specific ETFs that seek daily results corresponding to the inverse of the daily change in the index they track. So if the index goes down, then the fund is designed to go up that amount, before fees and other costs.
Direxion Daily 7-10 Year Treasury Bear 1x Shares (TYNS): inverse exposure to the NYSE 7-10 Year Treasury Bond Index;
Direxion Daily 20+ Year Treasury 1x Shares (TYBS): inverse exposure to the NYSE 20+ Year Treasury Bond Index;
ProShares Short 7-10 Year Treasury (TBX): inverse exposure to the Barclays Capital 7-10 Year U.S. Treasury Index;
ProShares Short 20+ Year Treasury (TBF): inverse exposure to the Barclays Capital 20+ Year Treasury Index.
Like all inverse and leveraged ETFs, these are not for everyone. Returns can diverge from the underlying index as a result of compounding, so be prepared to monitor such ETFs daily when you own them. These ETFs are not necessarily meant for buy-and-hold strategies, but with some understanding of how they work and an understanding of interest rate risk, they could be an excellent hedging vehicle.
"Our lineup of inverse bond ETFs has been extremely popular since launching less than three years ago," comments Michael L. Sapir, chairman and CEO of ProShare Advisors LLC.
Tom Lydon is editor and publisher of ETF Trends, a Web site with daily news and commentary about the fast-changing trends in the exchange-traded-fund (ETF) industry. Lydon is also president of Global Trends Investments, an investment advisory firm specializing in the creation of customized portfolios for high-net-worth individuals. Disclosure: At the time of publishing, Mr. Lydon's clients owned IndexIQ Agribusiness Small Cap ETF (NYSEArca: CROP).