U.S. Markets open in 1 hr 35 mins

Manage Equity Risk With GOVT Bond ETF

This article was originally published on ETFTrends.com.

Investors looking to balance equity-heavy portfolios with fixed income exposure have hundreds of bond exchange traded funds to consider. Conservative investors can lean toward U.S. government debt via the iShares Core U.S. Treasury Bond ETF (CBOE: GOVT) .

The $8 billion GOVT, which recently turned seven years old, follows the ICE U.S. Treasury Core Bond Index. GOVT holds 120 bonds with maturities ranging from one to 30 years.

“Most active Treasury bond managers derive most of their active returns from yield-curve positioning,” said Morningstar in a recent note. “That said, U.S. Treasuries are one of the most competitively priced areas of the bond market, so indexing Treasuries is a solid approach because it is difficult for active managers to recoup their fees.”

As more investors begin to add fixed income to their portfolios, it will take more of a strategic bent. This is especially so since the Federal Reserve said during its fourth and final rate hike in December 2018 that it will do more reassessing, which could mean lesser rate hikes in store for 2019.

With the short-term strategy of lesser rate hikes in store, the long end of the curve, however, is much less clear. As such, investors will need more guidance for their fixed-income portfolios.


GOVT has an effective duration of six years, making it an intermediate-term option. The fund has a yield to maturity of 2.58% and a 30-day SEC yield of 2.21%.

“The steeper the yield curve is, the better investors are compensated for the interest-rate risk. The duration risk of this strategy changes with bond-issuing activity. Since its inception in February 2012, this fund’s duration has crept up by 0.8 years,” according to Morningstar.

Related: “Patience” May Be Replaced by “Flexible” as the Fed Debates Inflation

Essentially all of GOVT's holdings are rated AAA and about 70% of its holdings have maturities ranging from one to seven years.

“This fund offers good downside protection and can serve as a portfolio ballast during market turmoil,” said Morningstar. “When markets go through a period of stress, Treasuries attract demand because of their perceived safety. This strategy launched in February 2012, but its index posted a cumulative gain of 13.4 percentage points from November 2007 through February 2009, while the S&P 500 lost 50.9 percentage points. But when the S&P 500 rebounded between March and December 2009, this fund’s index lost 0.1 percentage points.”

Morningstar has a Bronze rating on GOVT.

For more on fixed income strategies, visit our Fixed Income Channel.