UltraShort ETFs Could Be Sweet for Bond Fans

Yet thanks to an aggressive Federal Reserve and a broad flight to quality, high-quality bonds have held up, with interest rates as measured by U.S. Treasurys pushed to historic lows.

Market evidence suggests that trend has begun to reverse, with the yield on the benchmark 10-year Treasury rising above 4% from 3.2% in mid-March. Although it's still too early for decisive confirmation, it increasingly appears as if the bond market could be the next shoe to drop, if it isn't already in the process of doing so.

Bond prices move inversely to interest rates. As bond prices fall, interest rates go up, meaning that shorting bonds is the equivalent of betting on higher rates. And for the individual investor, there are an increasing number of options for betting against bonds.

Open-ended inverse bond funds have been around a number of years. One of the best known is the Rydex Inverse Government Long Bond Strategy (RYJUX) mutual fund, also known as the Juno Fund, which seeks to inversely correlate to the daily movement of long-term government bonds. Similarly, the ProFunds Rising Rate Opportunity (RRPIX) bets on higher rates, but adds a bit of leverage to the mix: The fund seeks to achieve 125% the inverse price movement of long-term government bonds. Direxion also offers two open-ended fund that short bonds: 10 Year Note Bear 2.5x Fund (DXKSX) and High Yield Bear Fund (PHBRX).

Although they offer the easiest and most simple option for getting exposure to higher interest rates, I'm put off by the lack of intraday liquidity and trading opportunity. The bond market is oftentimes even more volatile than the stock market, and the fact these funds can only trade at end-of-day prices limits their appeal.

Up until the introduction of the fixed-income ETFs I first profiled way back in 2002 it was nearly impossible for the average retail investor to directly short bonds without opening a futures account. The fixed-income ETFs changed that, giving investors of every stripe the ability to go long or short a variety of credit risks all along the yield curve, from short-term notes to long-term bonds. This opened up the opportunity to use strategies previously limited to large institutions.