Ben Bernanke's testimony before Congress finally seems to have
provided some much needed clarity to the market. The speculation
over the outcome of the Federal Reserve bond buying program
seemed to be the biggest worry for the markets.
And finally it seems that the possibility of a premature end
to the monetary stimulus, which was earlier hinted at, has been
scrapped by the outcome of this testimony. Therefore the Federal
Reserve seems likely to continue with the purchase of mortgage
backed securities and treasury bonds worth $85 billion until the
unemployment and inflation thresholds are met (read
Have We Seen the Bottom in Gold ETFs?
Nevertheless, the loose monetary policy being implemented by
the Fed since 2008 has resulted in very low, or even negative,
real interest rates in the economy.
Thus, yield hungry investors have had to look into a variety
of sources in search of current income. Some conservative
investors have even had to wander beyond their comfort zone to
riskier avenues such as junk bonds and dividend paying equities
in search of yields.
Yet with Bernanke providing clarity on the bond buying
program, rates are expected to remain lower for some more time.
This is especially true taking into account the fact that the
Federal Reserve is the single largest purchaser of Treasury
Of course, this has had a tremendous impact on the Federal
Reserve's balance sheet which has expanded to gigantic
Can the Dollar ETF (UUP) Finally Break Out?
, especially the longer dated ones, had a terrific run in the
recent past following a series of global economic crises since
2009. This was followed by
quantitative easing programs by the Federal Reserve, as well as
'Operation Twist' which was aimed at keeping long term interest
All these factors surely did push treasury yields lower and
bond prices higher. However, things are not quite the same at
this moment. The 10 year treasury rates back then in the latter
part of 2009, were well above 3.5%. Therefore one could argue
there was substantial room for depressing interest rates at the
However, with the benchmark 10 year rates nearing 1.88% at
present, the biggest question still remains-How low can yields go
from current levels despite continuation of the monetary easing
measures? Probably not too much further, thus one could make a
case for limited profit potential of the Treasury Bond ETFs in
Despite all these arguments, the inevitable cannot be
changed-The Fed has to suck back liquidity from the economy and
interest rates will rise causing bond prices to fall sometime in
future. But that 'sometime' seems to be quite far off from
Nevertheless, let us have a look at some of the choices from
the Treasury Bond ETF space. These could be good avenues to park
money, given the possibility of the sequester which may cause
risk aversion once again and a switch from equities into bonds
With Sequester Ahead, Are Defense ETFs in
iShares Barclays 20+ Year Treasury Bond ETF (
The ETF tracks the longer end of the yield curve with a
weighted average maturity of 27.51 years. Being a long term
treasury bond ETF it carries a high interest rate risk as
measured by the effective duration of 16.87 years.
TLT was launched in July of 2002 and since then has managed to
amass an asset base of $3.11 billion. It charges investors 15
basis points in fees and expenses. It has a concentrated
portfolio of just 20 securities in its portfolio with around 74%
of its total assets invested in the top 10 holdings.
TLT has a distribution yield of 2.64% and has returned 3.25%
in the fiscal year 2012. It has a Zacks ETF Rank of 3 or
Vanguard Long Term Government Bond ETF (
The ETF follows the Barclays Capital U.S. Long Government
Float Adjusted Bond Index. The index measures the performance of
U.S Treasury securities having a residual maturity of more than
VGLT has a portfolio of 63 securities in all with a yield to
maturity of 2.90%. The ETF has a weighted average maturity of
23.8 years and an average duration of 16.1 years. The ETF has an
asset base of $236.77 million and charges investors 12 basis
points in expenses (see
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VGLT has returned 3.25% in the last one year period as of 31
December 2012. It also has a Zacks ETF Rank of 3 or 'Hold.'
iShares Barclays 10-20 Year Treasury Bond ETF (
The ETF tracks the performance of Treasury Bonds having a
residual maturity between 10 to 20 years. It tracks the Barclays
Capital U.S. 10-20 Year Treasury Bond Index. The ETF was launched
in January of 2007 and since then has been able to amass an asset
base of $454.69 million.
Like its iShares counterpart TLT, the ETF also has a fairly
concentrated portfolio of 20 securities in all with 71% of its
total assets invested in the top 10 holdings. The ETF has a
weighted average maturity of 13.97 years and an effective
duration of 9.96 years.
The product has returned 4.09% for the fiscal year 2012 and
has a distribution yield of 2.02%. TLH has an expense ratio of
0.15%. The ETF has a Zacks ETF Rank of 3 or 'Hold'.
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ISHARS-BR 10-20 (TLH): ETF Research Reports
ISHARS-BR 20+ (TLT): ETF Research Reports
VANGD-LT GOV BD (VGLT): ETF Research Reports
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