Intuitively one would think that investing equal amounts in an ETF such as TLT and an short ETF such as TBF (with some factor for the interest rate payout of the long fund) should result in a interest rate neutral strategy.

However, this does not work out in a back test. What am I missing out?

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    $\begingroup$ You should describe what's in both ETF and probably post links to product description since you're citing them. Moreover, you should add where your backtest results come from, how you came to the conclusion that you were still exposed to interest rate, and so on. $\endgroup$ – SRKX Mar 4 '15 at 2:09
  • $\begingroup$ TLT is a bond ETF that tracks an index of 20+ years maturity bonds and which pays regular dividends. TBF is an bond ETF that inversely (short) tracks the same index. Obviously pays no dividends. I ran a back test by simulating the purchase of shares of each for investments of 100000 dollars each at a given start date. If TLT and TBF reflect the index (TLT follows and TBF is inverse) I would expect my total investment to hover around 200000 for the duration under test with variations reflecting the dividend received by TLT. $\endgroup$ – Syed Tariq Mar 4 '15 at 4:57
  • $\begingroup$ However, I found that the total value was not what I expected. In the period of the last several years (declining interest rates) TLT gained much more than the loss experienced in TBF. $\endgroup$ – Syed Tariq Mar 4 '15 at 4:57

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