Weekend Investor: Investors come up short on inverse bond funds - Financial - Financial Services - Personal Finance - Mutual Funds - Bond Market
This is a good article about the potential pitfalls of inverse bond funds. The article says that as a group they have done poorly and they are kind of expensive.
Bond prices have gone up and the prices of these funds have gone down. They are inverse funds, so to say they have done poorly doesn't quite seem right to me. They are supposed to move in the opposite direction of bonds and have done so. I'd say they've done well. What hasn't done well are the investors that have used these funds to speculate on the bond market.
The last few sentences of the article deal with a different use for these funds; hedging. I use the ProFunds for a few clients as a hedge if/when rates rise. I own a small enough position that it hasn't created much drag on that part of the portfolio. The decline over the last year has been about 13% in that one.
If the inverse bond funds are down that means that other parts of a fixed income portfolio are doing well, that's good.
That they are down is not in and of itself a reason to sell. You either want a hedge or not. If you do, it is working quite well. I'm not sure what to tell someone that is on the wrong side of a trade.
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2 comments:
Seems like for the past year, everyone on the planet has been predicting rising long-term interest rates. So there was all this discussion and discourse on how to make wads of cash. Real estate was supposed to collapse, too.
None of that happened. Maybe it will someday. But, those folks have been wrong. Long term rates are down, bonds are doing nicely, and real estate had another great year.
I like your comments about inverse bond funds being a hedge. I think most were thinking of it as an investment. In the latter, it's really just a speculation.
My financial advisor thought betting on rising rates (RRPIX) was a sure thing with little downside risk. What people soon find out with these funds is the daily compounding effect has a large effect on your return. These are very sensitive timing instruments. People say that China & Japan's monetary policy is to prop us the USD, to help their exports. Plus China's manufacturing, technology-driven gains in productivity keep prices down. Nor is there a huge demand for investment capital here either. And RRPIX was a long-bond vehichle. They now offer a short-bond analog.
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