You knew it was coming, and now it’s finally arrived: the first Canadian ETF that shorts the bond market. On June 29, the Claymore Inverse 10 Year Government Bond ETF (CIB) began trading on the TSX. The fund is designed to deliver the opposite of the daily return of 10-year Government of Canada bonds. In other words, it caters to the Fear of the Month: rising interest rates.
Of course, bond prices fall when interest rates rise, and long-term bonds are the most sensitive to this risk. For more than a year, since the overnight rate bottomed out at 0.25% last April, pundits have been warning investors away from long maturities, which seem certain to fall. Meanwhile, amid all the anxiety, the iShares DEX Long Term Bond Index Fund (XLB) has returned more than 14% in the last 14 months, including distributions. The lesson here is that attempts to forecast interest rate movements is rank speculation.
That’s why this new Claymore ETF scares me. I’m concerned that Couch Potato investors, worried their bond holdings are “certain” to fall in the near future will think this product can offer some safety.