3 Bond ETFs Surging As Interest Rates Tumble [iShares Barclays 20+ Yr Treas.Bond (ETF), Vanguard Extended Duration ETF]

Investors should also note that this is a very cheap product, as it charges just 12 basis points a year, so it will be a very low cost way to get into long duration bonds. However, the real selling point as of late has been the price appreciation as EDV has added roughly 9.9% in the year-to-date time frame (see Best ETF Strategies for 2014).

PIMCO 25+ Year Zero Coupon US Treasury Index Fund (NYSEARCA:ZROZ)

Another fund targeting the Treasury STRIPS market is ZROZ. This product follows the BofA Merrill Lynch Long US Treasury Principal STRIPS index, which focuses on treasury principal STRIPS that have 25 years or more remaining to final maturity.

This results in a portfolio that is similar to EDV, though ZROZ only holds 21 securities in its basket. Additionally, ZROZ has a bit higher effective maturity—at 27.3 years—while its 30 Day SEC Yield comes in at a slightly more robust 3.65%.

Still, investors should note that ZROZ has less in volume and assets, while it does cost 15 basis points a year in fees. However, with its higher duration and maturity, it can outperform when rates are sliding, which has been the case in 2014, allowing ZROZ to post a 10.5% gain YTD.

Bottom Line

Just remember that all of these bond ETFs have very uncertain long term outlooks, and could eventually be hit by the taper. This may be especially true if emerging market rate hikes start to stem the flow of capital out of these nations, and if U.S. stocks can resume their upward trajectory.

Until that time though, the aforementioned bond ETFs look to remain in focus. They are primed to be the biggest beneficiaries of the downward move in rates, and with their solid yields they can help your portfolio to absorb some of the recent market shocks in the mean time as well.

This article is brought to you courtesy of Eric Dutram.

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