Using Leverage To Profit From Rising Rates

With just a few days left until the most widely anticipated Federal Reserve meeting in recent memory, it is clear that participants in the exchange-traded funds market are betting that the Fed will raise interest rates next month. A recent survey of fund managers confirms as much, as the participants expecting higher interest rates next month is around 81 percent, up from 47 percent in October.

Rate Rise Is Coming

The impact of higher interest is already being felt in the world of exchange-traded funds. Predictably, the Federal Reserve loomed large in the ETF decisions made by advisors and investors last month.

With many market participants expecting that the U.S. central bank will, later this month, boost borrowing costs for the first time in nine years, U.S. stock ETFs received more cash on expectations that the looming rate hike signals Fed confidence in the strength of the world's largest economy.

Related Link: Deutsche Bank Defends Fed, Says Rate Hike Is Not A Mistake

Conversely, investors yanked $4.5 billion from fixed income funds in November, according to BlackRock data. In November, five of the 10 worst ETFs in terms of lost assets were bond funds, while just one fixed income fund ranked among the month's 10 best asset gatherers.

On Investors' Radar

Perhaps the Direxion Daily 7-10 Year Trsry Br 3X Shr (NYSE:TYO) should be on more traders' shopping lists. TYO attempts to deliver triple the daily inverse of the performance of the NYSE Current 7-10-Year U.S. Treasury Index.

Interest rate moves have greater impact on portfolios further out on the yield curve. With a current annual yield of 2.967 percent, a 1 percent increase in the interest rate will result in a return of -17.42 percent, said Direxion in a recent note.

Data suggest traders are becoming acquainted with TYO in advance of next week's Fed meeting. For the five days ended December 9, TYO's volume was more than 112 percent above the trailing 20-day average, according to Direxion data.

Other Investors' Concerns

Other data indicate investors are concerned about longer-dated bonds in advance of higher interest rates and the potential for several more interest rate hikes next year. For example, the iShares Barclays 7-10 Year Trasry Bnd Fd (NYSE:IEF) has bled $703.1 million in assets during the fourth quarter.

Rates are going to rise. At least most market analysts and media are expecting them to rise some say as early as December 16. And most accept the fact that the Fed needs to raise rates because employment is too strong not to do so. And when they do, investors who are caught unprepared may miss out on opportunities to hedge or ride the momentum, added Direxion.

Image Credit: Public Domain

2015 Benzinga does not provide investment advice. All rights reserved.