Long-Term Treasury ETFs Back In Focus [Vanguard Extended Duration ETF, iShares Barclays 20+ Yr Treas.Bond (ETF)]

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January 30, 2014 5:03pm NYSE:EDV NYSE:TLT

etfs etfsAfter a lackluster 2013, the fixed income world is finally gaining some traction this year. In particular, investors are adding long-term Treasuries to their portfolio as surprisingly weak jobs growth and low inflation for December raised concerns

about sustained economic improvement and continuation of Fed taper plans.

The U.S. economy added just 74,000 jobs in December, much below analysts’ expectation of 200,000 (as polled by Reuters). This represents the slowest job growth rate in three years. However, this weakness could be largely due to severe cold weather, which is a temporary factor.

Though annual inflation rate was at 1.5% in December — the largest increase in six months — it is still far cry from the Fed’s target of 2%. The combination of feeble job numbers and persistently low inflation, boosted the appeal for the long duration bonds. This is because low inflation will continue to keep interest rates at lower levels for longer than expected, driving the yields down and bond prices up.

Further, if inflation continues to fall or job numbers continue to disappoint, the Fed might take a cautious stance on its plan to curb QE3 by extending the timescale of its tapering process or holding off reductions for longer than initially expected.

After months of speculation, the Fed finally decided to cut its bond purchases by $10 billion starting this month. It also reiterated that the scaling back of asset purchases wasn’t on a preset course, and that future decisions on asset purchases would be made based on upcoming data releases (read: Fed Tapers Bond Purchases: 3 ETFs in Focus on the News).

All these factors are encouraging investors to enter into the bond market. As such, long-term Treasury funds like iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) and Vanguard Extended Duration Treasury ETF (NYSEARCA:EDV) have witnessed strong momentum to start the year.

TLT and EDV in Focus 

TLT gathered more than $164 million this month, propelling its total asset base to $2.33 billion. Meanwhile, EDV gathered nearly $23 million in capital, bringing its total asset base to $157.5 million.

TLT is one of the most popular and liquid ETFs in the bond space. It follows the Barclays Capital U.S. 20+ Year Treasury Bond Index. Holdings 22 securities in its basket, the fund focuses on the top credit rating bonds (AA+ and higher). The average maturity comes in 27.40 years and the effective duration is 16.38 years.

The ETF charges 0.15% in annual fees and has added 3.5% so far this year. The fund has a decent Zacks ETF Rank of 3 or ‘Hold’ rating (see: all the Government Bonds ETFs here).

On the other hand, EDV provides exposure to the long-term Treasury STRIPS market by tracking the Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index. The fund holds 66 bonds in total with average maturity of 25.3 years and average duration of 24.8 years. Expense ratio came in at 0.12%. The fund gained 5.5% in the year-to-date time frame and has a Zacks ETF Rank of 4 or ‘Sell’ rating.

Bottom Line

Treasury bond ETFs were the worst hit last year on taper talks and the resultant increase in interest rates. However, this year, disappointing jobless claims and low inflation have spread volatility in the equity stock markets, bringing the luster back into these safe haven investments.

This article is brought to you courtesy of Eric Dutram.

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