Best Inverse Bond ETF

Interest rates has been in secular decline for last decade. Federal reserve’s response to the financial crises has kept rates lower and far longer than anyone would have thought. As with everything in life, nothing lasts forever.

The Fed will eventually raise rates from the current multi decade lows and as rates rise (which imply bond price to fall with positive impact on the US dollar ETFs). Inverse bond ETFs is the easiest way for investors to take advantage of decline in bond prices or as a hedge to existing fixed income positions.

Inverse bond exchange traded fund prices moves in reverse of bond prices. Essentially, the list of inverse bond ETFs below are naturally short bonds. Investors can utilizes these vehicles instead of for example shorting bond futures directly as it provides an easier way to manage interest rate risk and position sizing within the portfolio.

Bonds are bespoke products where the terms of each issue are different. Due to bespoke nature of fixed income. Bonds in the inverse ETF portfolio are usually represented by US government bond. This is because they are the most liquidity and fungible fixed income product within the asset class.

For typical investors this also eliminate the question of credit risk, essentially make the play as a rate and term structure move rather than overly complicating trades by introducing credit risk factor.

This is a continuation of our Inverse ETF special report, our previous research provide insights into primary differences between equity inverse ETFs.


Not all bonds are created equal

The pace of declines in bond prices is a function of bond’s duration. Bond duration essentially represent the approximate term of the bond until maturity. Depending on the context of the rate rise either in the Fed Funds rates which are short term rates or the US 10 year treasury bonds which represent the benchmark of long term rates. Shorting the right duration bond is critical to maximize effectiveness of the trade. 

Short term rate changes is best represented by the 2 year bond benchmark. Medium term by 5 year term bonds and longer term by 10 year US treasury. 


Inverse Bond ETF list

Each inverse bond ETF listed below provides a unique position in the interest rate term structure. Therefore final results would differ depending on the nature of change in the interest rates and depth of change throughout the interest rate curve. These inverse bond funds allows investors to position themselves as you see fit with maximum leverage to expected change in rates.

iPath US Treasury 2-year Bear ETN
Short Term Rates
iPath US Treasury Steepener ETN
Spread Trade
iPath US Treasury Flattener ETN
Spread Trade
iPath US Treasury 5-year Bear Exchange Traded Note
Medium Term Rates
ProShares Short 7-10 Year Treasury
Medium Term Rates
iPath US Treasury 10-year Bear ETN
Long Term Rates
ProShares Short 20 Year Treasury
Long Term Rates

 Most of the funds are self explanatory however below are some reverse bond funds which provide a nuance approach to take advantage of decline in bond prices.


iPath US Treasury Steepener and Flattener ETN

iPath provides a number of inverse bond ETFs. Some are straightforward like DTUS and DFVS. However STPP and FLAT are designed for investors looking to take more advance positions for specific moves not only in the direction of the rate change the overall composition of the interest rate curve. These are almost like a smart beta ETF where they stray from traditional index tracker exchange traded funds. 

As interest rate curves are naturally upward sloping. It is a gradual upward slope from the short end of the curve (90 day bills) to longer end of the curve 2, 5 10 and 20 year treasury notes. 

A steepener trade is a bet that the interest rate curve will not only shift but that rate of increase in the rate between maturity will also steepen. For example the 10 year rate will rise faster than the 5 year curve. Hence the spread position would be to short the 10 year and buy the 5 year bond. STPP allows investor the exposure without wading into the treasury market directly to put on the trade. 

While these spread trade fixed income ETFs will not fit into a conservative ETF portfolio. They have their uses for investors that are at a higher end of the risk curve.

Flattener ETN seek to track that the curve will flatten essentially so would result in shorting 5 year bond and long the 10 year bond to close the gap between these 2 maturities. These 2 strategies would work between bonds of any maturity.


Leveraged Inverse Bond ETF

The above inverse fixed income ETFs tracks changes in the bond futures dollar by dollar. The leverage Inverse ETF list below highlights 3 inverse bond funds that provides inherent leverage in the fund. It is important to note that the impact of leverage also depends on the bond maturity. Longer dated paper are more sensitive to movements in rates than shorter dated bonds. Primary differences between the leverage Inverse Bond ETFs below is that Barclays ETF is a composite of various maturities while TMV and PST are straight single maturity leverage bond ETF.

Barclays Inverse US Treasury Composite ETN
x5 leverage
Direxion Daily 20-Year Treasury Bear 3X
x3 leverage
ProShares UltraShort 7-10 Year Treasury
x2 leverage


Barclays Inverse US Treasury Composite ETN

Barclays inverse ETN tracks the total returns of a portfolio of short bond positions using bond futures. This portfolio consist of the front month (which is usually the most liquid contract)

  1. 2 year bond
  2. 5 year bond
  3. 10 year bond
  4. long bond
  5. ultra long bond

 The portfolio is an equal weight of all 5 different bond contracts and are rebalanced frequently to ensure overall changes in the portfolio matches combined daily changes of the underlying contracts. 

Table below shows the sensitivity in changes of bond prices from 0.01% change in rates. As it can be seen from DV01 column below. 2 year bonds have the lowest dollar sensitivity. The price of ultra bonds is 10 times more sensitivity than 2 year bonds.

DV01 per $100 Face Value
2 Year
5 Year
10 Year
Long Bond
Ultra Long


Inverse High Yield ETF

As of now ProShares Short High Yield (SJB) is the only Inverse ETF that short high yield bonds. One important point on short high yield ETF is that due to high coupons of underlying bonds, investors shorting these bonds would also have the headwind of paying expensive coupons while waiting for the trade to work.


Inverse Municipal Bond ETF

There are no inverse muni bond ETFs which track opposite movements in municipal bonds.