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Take A More Balanced Approach In The U.S. Treasury Market With This ETF (PLW)

December 9th, 2012

Eric Dutram: Although the American fiscal position isn’t exactly great, there is still substantial demand for U.S. Treasury bonds. This is despite low rates on these securities, and is due at least in part to the lack of other options in the space.

Japan’s bonds are yielding even less while their government is in a worse fiscal position than America, while Europe is probably too volatile for most investors. Emerging market securities are coming on strong, but as of now, none of have the deep liquidity and size of the American bond market, making U.S. Treasury securities a staple of many portfolios (see Three Bond ETFs for a Fixed Income Bear Market).

For investors uninterested in holding just one or two U.S. treasury bonds, a number of ETFs have appeared to give investors broader exposure to the space. Most of these securities focus on a particular maturity level, either offering investors holdings in short-term, mid-term, or long-term government bonds.


There is, however, an exception to this with the PowerShares 1-30 Year Treasury Laddered ETF (NYSEARCA:PLW). This fund looks to take an entirely different approach to Treasury bond investing, giving a more holistic view of the market.

This ETF tracks the Ryan/Mergent 1-30 Year Treasury Laddered Index, which is a broad benchmark of American Treasury securities not including STRIPS, TIPS, or ultra-short term T-bills. Instead, the fund holds approximately 30 equally weighted U.S. Treasury issued with fixed coupons, scheduled to mature in a proportional, annual sequential—read ‘laddered’—structure.

In other words, PLW holds roughly one U.S. Treasury bond issue for each of the next 30 years in roughly equal quantities, although it should be noted that mid term debt maturing in roughly 20 years time does receive a bit of an outsized portion of the total assets (see Forget Interest Rate Risk with These Bond ETFs).

This approach gives the fund a very spread out profile in terms of maturity dates with roughly 15% of the portfolio maturing in five years or less with 17% maturing in 25 years or more on the flipside. This leaves the bulk for mid-term securities—suggesting a tilt for this asset level—although even this is well spread out among the various maturity levels.

The fund could be appropriate for those seeking a mid-term duration play on the Treasury market with a more balanced approach. Although, it should be noted that the 30-Day SEC yield is just 1.6% so it won’t be much of a yield destination, but it could be a more even way to tackle the Treasury market.

This is especially true given that the fund sees decent volume on a modest size asset base, so bid ask spreads should be modest. Additionally, the expense ratio comes in at 0.25% so it will be a relatively low cost pick as well.

While some might be wondering why they should take this approach when compared to other mid range Treasury ETFs, a look to yield and price performance could demonstrate why PLW is a potentially better pick.

The ETF has a better yield than PIMCO’s mid-range product (NYSEARCA:TENZ), although it slips in comparison to iShares’ 10-20 year Treasury bond ETF (NYSEARCA:TLH). While both are a little less expensive than PLW, the PowerShares product has proven itself to be a good middle ground between the two in terms of volatility—but also performance as well, at least over the past one year period.

So for investors seeking a potentially more balanced approach in the U.S. Treasury market, PLW could be an interesting choice. While the fund is a little pricier than its counterparts, the ETF does offer up a nice mix of holdings that is unmatched by others in the space, suggesting it could be well positioned no matter what happens in the next few months in the U.S. Treasury market.

Written By Eric Dutram From Zacks Investment Research 

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.


NYSE:PLW, NYSE:TENZ, NYSE:TLH


 

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