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Bond ETFs Go Tactical. Technically.
An operator at the U.S. Army Tactical Operations Center from the U.S. Army, in the public domain.

Bond ETFs Go Tactical. Technically.

Long-term funds are breaking out.

By now you’ve undoubtedly seen the inversion developing in the Treasury yield curve. Investors are now rewarded with higher yields on T-bills than on longer-term notes. To a point. There’s still a yield premium on the extreme left of the curve where 20-year and 30-year paper trade.

Investors are, in fact, in love with longer-dated notes and bonds. Or so it seems from the charts. A number of exchange-traded notes tracking the 20+ year segment have just broken out of long-developing head-and-shoulders bottoming patterns. Technically speaking, breakouts from head-and-shoulders configurations are the most reliable. About 84 percent of securities exhibiting the pattern end up reaching their predicted price objectives.

Five long-duration ETFs in particular standout:

  • The PIMCO 25+ Year Zero Coupon US Treasury Index ETF (NYSE Arca: ZROZ) has the greatest upside potential, owing largely to its stock market-like volatility. ZROZ tracks an index of STRIPs -- Treasury notes devoid of coupons and sold at deep discounts to their face value. STRIPs are exquisitely sensitive to interest-rate risk. The ETF’s 24.4-year duration reflects this. Lightly traded – an average of 18,600 shares daily – ZROZ has the potential to ultimately rise 24 percent from Monday’s closing price.
  • Not quite as volatile, the Vanguard Extended Duration Treasury ETF (NYSE Arca: EDV), is now staging a 14 percent boost from Monday’s close as a platform for further action. EDV also trades STRIPs, earning the ETF a duration of 23.8 years. About 94,600 EDV shares change hands daily.
  • Want really long duration? You’ll get 25.9 years by holding the iShares 20+ Year Treasury Bond ETF (NYSE Arca: TLT). Unlike ZROZ and EDV, TLT owns conventional Treasury paper, so day-to-day volatility is relatively low by comparison. Still, the ETF is aiming for a 15 percent gain from Monday’s close. TLT is very popular with investors, trading in excess of 8 million shares a day.
  • At 25.1 years, the SPDR Portfolio Long Term Treasury ETF (NYSE Arca: SPTL) offers a slightly lower duration than TLT, reflecting its longer reach along the yield curve. SPTL takes in notes and bonds with maturities of 10 or more years. Technically, SPTL has the capacity for a 13 percent uptick from Monday’s close, trading on a 566,000-share daily turnover.
  • About 152,600 shares of the Vanguard Long Term Treasury Index ETF (Nasdaq: VGLT) daily, mainly among more risk-averse investors. The ETF owns a heavier dollop of 10-year paper than SPTL, thereby shortening its duration to 17 years.

long term etfs

Long-duration bond ETFs are typically strategic allocations designed to be held as permanent parts of an investor’s portfolio. Every once-in-a-while, though, a tactical trading opportunity presents itself. Now seems like one of those times.

Brad Zigler is WealthManagement's Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

TAGS: Investment
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