What is UST? (Pros, Cons, and Strategies)

Investors seeking diversification in their portfolio often turn their eyes to a variety of investment vehicles. If you are looking for exposure to U.S. Treasury securities with a bit of leverage to potentially enhance returns, the ProShares Ultra 7-10 Year Treasury (UST) may come into consideration. This blog post will dive into what UST is, its advantages and disadvantages, and some strategies for incorporating it into your investment portfolio.

What is UST?

UST is an exchange-traded fund (ETF) that aims to provide twice the daily performance of the ICE U.S. Treasury 7-10 Year Bond Index.

Key Features of UST

• Leverage: UST uses leverage to target returns that are 200% of the index’s daily performance.
• Maturities: The fund invests in U.S. Treasury securities that have maturities ranging from 7 to 10 years.
• Benchmark: It tracks the ICE U.S. Treasury 7-10 Year Bond Index, generating returns through leveraged exposure.

UST Composition

UST is composed primarily of U.S. Treasury securities in the specified maturity range. These government-issued securities typically include Treasury Notes that are seen as relatively safe investments due to the backing of the U.S. government.

Pros of UST

Potential for Enhanced Returns

The major allure of UST is its leverage. By targeting twice the performance of its underlying index, UST provides the opportunity for enhanced returns, especially during periods of falling interest rates when bond prices generally rise.

Government-Backed Securities

The underlying securities in UST are U.S. Treasuries, which are often considered among the safest investments as they are backed by the full faith and credit of the U.S. government.

Diversification in a Portfolio

Adding UST to your portfolio can offer diversification, particularly for investors who are primarily invested in equities. Bonds typically have an inverse relationship with stocks, thus providing a buffer during stock market downturns.

Cons of UST

Increased Risk Due to Leverage

While leverage can amplify returns, it can also magnify losses. UST is not suitable for all investors, particularly those with a lower risk tolerance or those who are inexperienced with leveraged financial instruments.

Interest Rate Sensitivity

UST is highly sensitive to changes in interest rates. If interest rates rise, the prices of the underlying treasury securities will fall, potentially leading to significant losses in the ETF.

Not Suitable for Long-Term Holding

UST aims to provide twice the daily return of its index. Due to the compounding effect, the performance of the ETF over longer periods might not directly correspond to twice the index's performance over the same period. It requires regular monitoring and adjustments, making it more suitable for short to medium-term strategies.

UST Investment Strategies

Given its leveraged nature and sensitivity to interest rate changes, UST requires a strategic approach to be an effective component of your investment portfolio.

Short-term Tactical Allocation

UST can be a useful tool for short-term tactical allocations when you anticipate falling interest rates. For instance, you can hold UST during periods when you believe the Federal Reserve is likely to cut rates or maintain a dovish monetary policy.

Hedging Strategies

Investors might use UST as a part of a hedging strategy within a broader investment portfolio. If you already have significant exposure to equity markets and are concerned about potential downturns, a position in UST could help offset some of those risks.

Leveraged Bond Strategy

For those looking to take more aggressive stances on bond market movements, UST might fit into a leveraged bond strategy. This approach would involve closely monitoring economic indicators and adjusting positions frequently to capitalize on expected bond price movements.

Not for Passive Investors

Given the intricacies involved in leveraged ETFs, they are generally not suitable for the "set it and forget it" type of investment strategy. UST requires active monitoring and timely decision-making, making it more appropriate for seasoned investors.

Conclusion

UST stands out as a leveraged ETF designed for investors looking for enhanced exposure to U.S. Treasury securities in the 7-10 year maturity range. While its potential for higher returns through leverage is attractive, the risks associated with such an investment should not be underestimated. For informed, active investors, UST can be a valuable addition to a diversified portfolio when used correctly. However, those looking for more stable, long-term investments may want to consider other options.