Trading bonds is like putting your money in a safe account, since bonds are considered the least risky assets. Yet, the yield can break the usual levels when you trade leveraged ETFs that relate to bonds. Of course the risk increases by many times since leveraged ETFs should be seen as a short term investment opportunity.

In this post, we would like to talk about two leveraged ETFs that indirectly relate to bonds, particularly to 20-year Treasury bonds. These are TMF (Direxion Daily 20+ Year Treasury Bull 3X) and TMV (Dirextion Daily 20+ Year Treasury Bear 3X ETF). Both TMF and TMV track the same instrument – a typical ETF with the ticker TLT (iShares 20-Year Treasury bond ETF).

We will see the specific nuances of TLT below, but first, let us see what the leveraged ETFs can offer us?

Leveraged ETFs

Leveraged ETFs are the funds that apply derivatives and debt as additional instruments to amplify the performance of an underlying asset, such as another ETF. In our case, the underlying asset is the TLT fund, which tracks the 20-year Treasury bonds. TLT drives the leveraged ETFs – TMF and TMV. Generally, the leveraged ETFs use 2:1 and 3:1 leverage, the latter being more popular.

The most important thing you should consider is that leveraged ETFs should not be traded in the long term since they are more volatile and they are particularly designed to increase the returns in the short-term, like during a single day. They cannot guarantee you a positive yield in the long term, which is why it’s not a good idea to use them for diversification purposes. It would be more correctly to consider them for speculation. You can boost your profits if you know how to trade leveraged ETFs by keeping positions up to several days.

How to trade TMF and TMV?

We’re done with describing the general principles of leveraged ETFs and I hope you got the idea. Now it’s time to discuss the TMF and TMV funds. Both of them track TLT, but in different directions.

The main goal of TMF (Direxion Daily 20+ Year Treasury Bull 3X) is to generate a 300% daily gain of the TLT returns. This means that TMF should be traded when you feel the TLT’s percentage change will be positive.

The target of TMV (Dirextion Daily 20+ Year Treasury Bear 3X ETF) is to profit a 300% value of the TLT daily losses. This suggests you that TMV is suitable for traders who want to go short on TLT.

As the titles suggest, both funds try to provide you with 3:1 leverage. However, it doesn’t mean that their daily changes precisely relate to TLT performance based on the 3:1 ratio. This ratio is more like a target, and the leveraged ETFs try to maintain it, but the outcome may be relative.

Tracking TLT

iShares 20-Year Treasury Bond ETF (TLT) is one of the best ETFs related to the US Treasury bonds. It’s really a great alternative to the bond market, since the fund is liquid and is monitoring bonds with high precision. To convince you about this, just check this chart:

As you can see, TLT fund (blue) has relatively the same performance as the IDCOT20 index (yellow), which tracks 20+ years Treasury bonds.

TLT is an ETF that trades over 10.7 million shares per day, which is more than twice the daily volume right after the 2008 crisis. The TLT demand rose drastically in the recent period because of the Fed’s policies of quantitative easing and record low interest rates. During its QE programs, the FED bought many bonds, which boosted the TLT demand as well. There were three QE programs implemented by the Fed. You can see on the chart below how each program influenced the performance of TLT:

Basically, every time the Fed implemented its QE program amid historical low levels, TLT and other bond tracking ETFs peaked.


Prior to making any investment decision related to the leveraged ETFs discussed in this post, you should understand how these relate to the underlying asset – TLT. In short, TMF tends to increase three times more than TLT during a single day, while TMV tends to gain a 300% value of the TLT daily drop. We discussed that TMF is for going long on TLT and TMV is for going short on it.

Here is the relationship on the chart:

As you can see, TLT, which is the base ETF, is a less volatile instrument, while the leveraged ETFs – TMF and TMV show amplified results.

TLT prediction

Since iShares 20-Year Treasury bond ETF (TLT) is heavily related to the Federal Reserve’s decision on interest and its policy, you should analyze the potential rake hikes by the Fed.

In December 2016, the Fed raised the interest rates from 0.25% to 0.5-0.75% annually. This was the second rate hike in a decade. Moreover, in December last year the Fed increased its forecast on the number of 2017 rate hikes from two to three. This is a sign that bonds may lose some demand against the US dollar and other more relevant assets.

This is a good sign to pay more attention to TMV fund rather than to TMF, which means you should think about going short on TLT.

While most of the leveraged ETFs are great for intra-day trading, TMF and TMV are quite special because bond prices often form gaps between the sessions. It means that swing traders can benefit the most. This is quite important to remember – the gaps can be very frequent, and the leveraged ETFs will amplify their value by three times, which suggests that you should be very confident about your prediction. Otherwise, your trade can easily be out of money. You should find the ideal balance and make your swing trading catch the general trend.

In order to make a more precise impression about the hawkish or dovish reactions from the Fed and FOMC members, you should analyze their speeches and also check the economic reports that can have a serious impact. This may be about the CPI, PPI, Nonfarm Payrolls, initial applications for unemployment benefits, GDP growth, and so on. All of these indicators are monitored by the Fed when they make their decision in favor or against another rate hike. Since the economy shows good results as of today, it seems the Fed is ready to make another step and increase the rate again.

The next FOMC meeting is in March, but there are few chances that the Fed will raise rates during this meeting. I think it’s too early, and most of the analysts expect no changes. However, you should analyze the conference after the meeting, which may give important hints about the future decisions.

In conclusion, the US economy is doing great and the Fed is ready to raise its rates, which will put pressure on bonds and consequently on the TLT fund. This is why TMV must be considered in the first instance.

Yet, this is only our opinion and we strongly recommend you to do your own research as well!

Be a Better Stock Trader, Starting Today

Get the expert insights, tips and strategies you need to optimize your trading skills and profiles

Our Raging Bull Experts have been featured on: