ProShares UltraShort 20+ Year Treasury (TBT)

This article describes an exchange traded fund that tracks an index, commodity, currency, or varied basket of securites. View articles referencing this fund.

 

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Kirk McClure

Ankur Dhamija

ProShares UltraShort 20+ Year Treasury (TBT) is an Exchange Traded Fund (ETF) that allows buyers to benefit when long treasury interest rates rise. TBT seeks daily investment results, before fees and expenses and interest income earned on cash and financial instruments, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Index.

TBT's structure limits its usefulness for long-term investors. Time decay of option (and swap) values and relatively high expenses contribute to likely tracking errors.

Underlying Index

The Barclays Capital (formerly Lehman Brothers) 20+ Year U.S. Treasury Index includes all publicly issued, U.S. Treasury securities that have a remaining maturity greater than 20 years, are non-convertible, are denominated in U.S. dollars, are rated investment grade (at least Baa3 by Moody’s Investors Service or BBB- by S&P), are fixed rate, and have more than $250 million par outstanding. The Index is weighted by the relative market value of all securities meeting the Index criteria. Excluded from the Index are certain special issues, such as flower bonds, targeted investor notes (TINs), U.S. Treasury inflation protected securities (TIPs), state and local government series bonds (SLGs), and coupon issues that have been stripped from assets already included. ^[1]

From inception to year-end 2008, TBT's daily change correlation with IShares Lehman 20 Year Treasury Bond Fund (TLT) was -0.98.

Principal Investment Strategies

ProShares UltraShort 20+ Year Treasury’s principal investment strategies include^[2]:

• Taking positions in financial instruments (including derivatives) that ProShare Advisors believes, in combination, should have similar daily return characteristics as twice (200%) the inverse of the Barclays Capital 20+ Year U.S. Treasury Index.
• Committing at least 80% of its net assets, including any borrowings for investment purposes, to investments that, in combination, have economic characteristics that are inverse to those of the Index.
• Employing leveraged investment techniques in seeking its investment objective.
• Investing assets not invested in financial instruments in debt instruments and/or money market instruments.

In practice, TBT sells leveraged 20+ Treasury swaps. ^[3]

Creation and Redemption of Creation Units

The fund issues and redeems Shares on a continuous basis at Net Asset Value (NAV) in large, specified numbers of Shares called “Creation Units.” This mechanism is intended to prevent large premiums or (especially) discounts from NAV. Creation Units of the Ultra ProShares are issued and redeemed principally in-kind for securities included in the relevant underlying index and an amount of cash. Except when aggregated in Creation Units, shares are not redeemable securities of the fund. Retail investors, therefore, generally will not be able to purchase or redeem shares directly from or with the fund. Rather, most retail investors will purchase or sell shares in the secondary market.

Volatility and Interest Rate Risk

Interest rate risk is the risk that debt securities or certain financial instruments may fluctuate in value due to changes in interest rates. The value of securities with longer maturities may fluctuate more in response to interest rate changes than securities with shorter maturities. TBT's leverage then doubles this extreme (by Treasury market standards, anyway) volatility.

References

1. ↑ http://media.proshares.com/documents/ProSharesProspectus.pdf
2. ↑ http://media.proshares.com/documents/ProSharesProspectus.pdf
3. ↑ TBT Holdings http://www.proshares.com/funds/tbt.html?Daily+Holdings