Direxion Daily 20+ Year Treasury Bull 3X is a bond exchange-traded fund that invests in US Treasury bonds with a maturity of more than 20 years. The ETF has a third leverage.
What's the idea?
Our team expects an accelerated reduction in inflation as early as the first half of 2023. The realisation of this forecast will have a positive impact on both stock and debt markets in anticipation of the Fed's move to a looser monetary policy.
Based on these estimates, we have selected two exchange-traded funds that could show significant growth if inflation starts slowing-down:
- Direxion Daily 20+ Year Treasury Bull 3X ETF
- iShares 20+ Year Treasury Bond ETF
Why do we like DIREXION DLY 20Y T BULL 3X?
A brief description of how bonds work
Bondholders not only earn a fixed yield on coupon payments, but also have the opportunity to increase their capital if the market value of the bond goes up. The market price of a bond and the interest rate are inversely related. In other words, an increase in the interest rate will reduce the market value of a bond and vice versa. This relationship also includes duration (weighted average payment flow term), which reflects the impact of interest rate changes. Prices of bonds with low duration react weakly to interest rate changes, while prices of bonds with a long maturity and therefore high duration exhibit high volatility in response to rate fluctuations. Roughly speaking, duration reflects a bond's degree of risk in terms of long maturity.
Description of the idea
We have previously presented our inflation forecast, where we have detailed all factors that indicate that the expected fall in inflation may accelerate in the first half of 2023. If our forecast materialises, we can expect a softening of the Fed's monetary policy, which will eventually lead to lower interest rates. It therefore makes sense to gradually build up positions in long bonds, which can show a high rate of appreciation. One instrument that could provide an opportunity to on this idea without building a bond portfolio is the Direxion Daily 20+ Year Treasury Bull 3X ETF.
This ETF replicates the performance of the ICE U.S. Treasury 20+ Year Bond Index, which reflects price movements in U.S. government bonds with a maturity of more than 20 years. It is worth noting that this ETF not only has a high duration but also a third leverage, which, if successful, leads to a multiple of the results but also increases the risk of the instrument.
Key characteristics of ETFs
- Type of fund: Specialty Fixed Income Funds
- Index: ICE U.S. Treasury 20+ Year Bond Index
- Fund assets: $368.9 illion
- Shoulder size: 3x
- Number of items in the ETF: 5
- Effective duration: 1719 years
- Average yield to maturity: 4.31%
- Weighted average maturity: 25.84 years
- Cost factor: 1%
- dividend yield: 1.1%
- YTD yield: -6934%
Instruments with the highest allocation to ETFs
- iShares 20+ Year Treasury Bond ETF: 6473%
- Dreyfus Government Cash Management: 40.74%
- Goldman Sachs FS Treasury Instruments FD: 30.24%
- Dreyfus Treasury Securities Cash Management: 3.98%
- iShares 20+ Year Treasury Bond ETF TRS: -39.45%