Long-term Treasury ETFs Back in Focus - ETF News And Commentary
January 28 2014 - 12:00PM
Zacks
After 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 (read: 3 ETFs Surging on Weak Jobs Data).
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 (TLT) and Vanguard Extended
Duration Treasury ETF (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 (read: Most Popular Bond ETFs of
2013).
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VANGD-EX DUR TR (EDV): ETF Research Reports
ISHARS-20+YTB (TLT): ETF Research Reports
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