3 Long Term Bond ETFs Surging As Rates Stay Low [Vanguard Extended Duration ETF, iShares Barclays 20+ Yr Treas.Bond (ETF)]

25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ)

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

This means that this benchmark focuses in on fixed income securities that are sold at a discount to face value, and then investors are paid the face value upon maturity. Investors should note that these sorts of bonds which operate on the zero-coupon format can underperform greatly in a rising rate scenario.

ZROZ holds only 21 securities in its basket. Additionally, ZROZ has a bit higher effective maturity – at 27.34 years – while its 30 Day SEC Yield comes in at a slightly more 3.48%.

Still, investors should note that ZROZ is not a very popular option with about $74.1 million in assets, though it does cost just 15 basis points a year in fees. However, with its higher duration and maturity, it can outperform when rates are sliding, as has been the case so far in 2014, allowing ZROZ to log a 19.05% return till date (read: 3 Bond ETFs Surging as Interest Rates Tumble).

Vanguard Extended Duration Treasury ETF (EDV)

For another long-term play on the bond market, investors have EDV, a fund that seeks to match the performance of the Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. This particular portfolio has an average maturity of 25.4 years, and a yield to maturity of 3.7% for this 66-holding basket.

Investors should also note that this is a very cheap product, as it charges just 12 basis points a year, so it will be an inexpensive way to get into long duration bonds. EDV has added 1.95% last week and 17.2% year to date (see Best ETF Strategies for 2014).

iShares 20+ Year Treasury Bond (TLT)

This iShares product provides exposure to the long-term Treasury bonds by tracking the Barclays Capital U.S. 20+ Year Treasury Bond Index. It is one of the most popular and liquid ETFs in the bond space having amassed over $3.8 billion in its asset base and more than 7.3 million shares in average daily volume. The expense ratio comes in at 0.15%.

Holding 23 securities in its basket, the fund focuses on the top credit rating bonds (AA+ and higher). The average maturity comes in 27.16 years and the effective duration is 16.81 years. The product gained more than 10.0% year-to-date and 1.12% past week. TLT currently has a Zacks ETF Rank of 3 or Hold rating with a high risk outlook.

Bottom Line

In a nutshell, long-term bond ETFs have suffered a lot of wobble last year and are presently trading at a compelling valuation. With the Fed steadily tapering the QE stimulus, investors will now start wondering about the time frame of increases in short-term rates and volatility will remain in the front end of the curve. Thus, long-term bonds can satisfy investors’ need at least for the short term, if not in the long run.

This article is brought to you courtesy of Zacks.com

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