Long-Term Treasury Bond ETF Investing 101
Being one of the safe havens, Treasury bonds (especially the long dated ones) had a terrific run last year, capping off their solid run following a series of global economic crises. This was due to few quantitative easing programs by the Federal Reserve, as well as ‘Operation Twist’ which was aimed at keeping long-term interest rates low.
However, beginning this year, investors are shifting their preferences to higher risk asset classes such as U.S. equities buoyed by improving global economic conditions. As a result, Treasuries had seen a massive sell-off in the first quarter (read: Time to Exit Treasury Bond ETFs?).
Now, with a disappointing March U.S. jobs report, weakening global sentiments and Eurozone financial strains, investors are again returning to the Treasury bond market in the second quarter, showing huge confidence with respect to this asset class. Further, aggressive easing measures by the Bank of Japan also encouraged investors to enter into the bond market.
These factors have pushed Treasury yields lower and bond prices higher. In fact, Treasuries have recorded the biggest weekly rally in 10 months in the first week of April. Yields on 30-year Treasuries fell below 3% for the first time since January, while yield on 10-year note fell to 1.764%, the lowest level since Dec 31, 2012.
Though yields might climb if economic data improves in the coming weeks, uncertain growth in the U.S. and euro zone as well as geopolitical tension in East Asia have bolstered the demand for even these long-term Treasury bonds. Hence, any sell-off in Treasury bonds might be viewed as a buying opportunity, at least with rates trending lower (read: Treasury Bond ETFs: Still Room to Run?).
In this backdrop, investors seeking to take advantage of the higher bond prices might try their luck with a long-term Treasury ETF. While there are a couple of choices in the space, we have highlighted the three most popular funds, which could be good avenues to park money with higher yields at this time (see more in the Zacks ETF Center).
iShares Barclays 20+ Year Treasury Bond ETF (TLT)
This fund is the biggest and most popular ETFs in the long-term Treasury bond space. TLT can be thought of as a ‘plain vanilla’ Treasury bond ETF which targets the long end of the yield curve.
The ETF tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index with a weighted average maturity of 27.69 years. Being a long-term treasury bond ETF, it carries a high interest rate risk as measured by the effective duration of 17.25 years.
The product has a concentrated portfolio of 22 securities in its portfolio with around 73.25% of its total assets invested in the top 10 holdings. TLT was launched in July 2002 and since then has managed to amass an asset base of about $3.5 billion. It charges investors 15 basis points in fees and expenses (read: Buy These Bond ETFs for Income and Diversification).
TLT has a distribution yield of 2.01% and has returned 1.35% in the year-to-date timeframe. In fact, the fund has added 4.30% alone in the first week of April. Currently, the ETF has a Zacks Rank of 3 or ‘Hold’.
Vanguard Long Term Government Bond ETF (VGLT)
This ETF follows the Barclays Capital U.S. Long Government Float Adjusted Bond Index. The index measures the performance of U.S Treasury or U.S. government securities having a residual maturity of more than 10 years.
Launched in Nov 2009, VGLT has a portfolio of 64 securities with a yield to maturity of 2.90%. The ETF has a weighted average maturity of 24 years and an average duration of 16.4 years. The fund has an asset base of $259.3 million and charges investors 12 basis points in expenses per year.
The product has returned 1.26% so far in the year and 3.73% last week. Further, it pays a good dividend yield of 2.51% (read: 3 ETF Strategies For Long Term Success).
VGLT also has a Zacks ETF Rank of 3 or ‘Hold.’
Vanguard Extended Duration Treasury ETF (EDV)
Launched in Dec 2007, this fund offers a STRIPS play on the Treasury bond market. This means that the interest payments and principal repayments are made independent of each other and are treated as separate components.
EDV tracks the Barclays Capital U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. The index measures the returns of U.S. Treasury securities which are highly sensitive to interest rate changes and have residual maturities ranging from 20 to 30 years.
While this might seem like an enticing option for investors, it is worthwhile to note that this is a more volatile investment strategy. Investing in EDV requires a big appetite for risk as an average duration of 26.0 years indicates that its interest rate risk is quite high.
With holdings of 54 securities, the product targets the longest maturity bucket in the treasury yield curve, and has an impressive distribution yield of 6.74%, which is far superior to the other funds in the space (read: Time for the Convertible Bond ETF?).
EDV has amassed $182.5 million in AUM while charging 12 bps in fees per year from investors. The ETF added 1.87% year-to-date, with a 7.12% gain in the first week of April. Currently, the ETF has a Zacks ETF Rank of 3 or ‘Hold’.
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Read the analyst report on TLT
Read the analyst report on VGLT
Read the analyst report on EDV
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