ETF Interest Rate Strategy – By ASC

Exchange traded funds provide a great way to trade economically sensitive interest rates

A small number of expensive and complex products such as interest rate futures. For retail traders looking for interest rate exposure, Treasury ETFs are a better place to start.

But before buying a bond ETF, take the time to understand some basics about rates. Before buying a Treasury ETF, it is important to understand some basics about rates. First, know that there is no one interest rate. Interest rates are determined by several factors, one of which is the likelihood of the borrower repaying the money. The greater the risk of default, the higher the interest rate. This is referred to as credit risk. To avoid credit risk and just trade rates, use Treasury ETFs. Supported by a robust U.S. economy, Treasury debt is largely considered “risk -free” with zero credit risk and serves as a global benchmark for interest rates. To trade rates and avoid credit risk, look to trade U.S. Treasury yields because U.S. government debt is largely considered “risk -free” because of its high credit quality.

Originally published In Luckbox Magazine. Subscribe for free at

The second factor that determines the interest rate is the term of the loan. Treasury debts are auctioned with maturities ranging from 30 days to 30 years, and each has its own interest rate. Plotting each of these rates and their respective periods produces a yield curve. (See “Yield Curve,” below.)

Note that the larger the term of the loan, the higher the interest rate. When choosing a rate to trade, keep in mind that longer dated debt also has greater volatility. Several popular Treasury debt ETFs and their weekly standard deviation ranges are shown in the chart. The farther on the curve the investor trades, the greater the weekly movement.

While these ETFs provide a great way to trade rates, note that they represent a group of Treasury debt prices and not their yields. Debt prices and debt yields move inversely. So a trader who thinks interest rates 20+ years will go down can buy, and someone who thinks they will go up can sell. Rising debt prices are always associated with declining yields and vice versa. While prices are an equalizer in comparing bonds, traders live in a world of yields. So an inversion is often needed to move from the idea of ​​trading to the execution of a trade.

In addition to trading certain parts of the yield curve, advanced interest rate trading strategies can also be built using these ETFs. A trader can combine them to trade turns and shifts in certain parts of the yield curve. Instead of buying or selling at a 20+ year rate, a trader can buy the iShares 1-3 Year Treasury Bond ETF (SHY) and sell the iShares Barclays 20+ Year Treasury Bond ETF (TLT) simultaneously to build a profitable yield curve trade if the difference. between short -term and long -term rates of increase. This is referred to as the steep yield curve. With a product that covers all parts of the yield curve, traders can trade almost all expectations of economic change with interest rates. (See “The Right Stock,” below.)

ETF Interest Rate Strategy

Michael Gough enjoys retail trading and writing code. He works in business and product development at Small Exchange, building index -based futures and professional partnerships.

Originally published In Luckbox Magazine. Subscribe for free at


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