Fixed Income: U.S. Government Treasury Long-Term
While one might expect homogenous coverage here, the ETFs in this segment offer very different exposures to long-term US government debt. True, all five funds uniformly invest in Treasurys,
“Each fund's definition of "long term" greatly affects its interest rate risk” and therefore can’t differentiate themselves by their country, sector or credit allocations. However, each fund’s definition of “long term” greatly affects its interest rate risk as longer-dated bonds are more sensitive to interest rate changes. In addition, longer-dated bonds tend to offer higher yields to compensate for their higher risk.
TLO reflects the market most closely—it matches our benchmark’s 10-30 year maturity span. However, investors who want less interest rate risk may prefer TLH, which offers the shortest weighted average maturity and shortest effective duration due to its 10-20 year range. On the other hand, those who want more risk should consider TLT, which only holds bonds that mature in 20 or more years. EDV and ZROZ take on even more interest rate risk: Both portfolios are made up solely of zero-coupon bonds and offer the segment’s longest durations and highest yields. (EDV and ZROZ make quarterly distributions even though their underlying bonds don’t pay coupons.)
Expense ratios aren’t a huge differentiator in this segment—they range from 12 to 15 bps—but liquidity is. TLT is by far the most liquid ETF here, with a daily median volume that’s larger than each of its peers’ AUMs. The other funds are all tradable, but expect volumes all over $1M and spreads between 5 and 34 bps. Only TLT trades well in size, doubtlessly aided by its volume in the secondary market. (Insight updated 03/24/17)
All Funds (5)
TLO $453.72 M 453723140 Marketlike
TLT $6.49 B 6494940440 Best liquidity
TLH $536.96 M 536964800 Shorter maturity
ZROZ $146.43 M 146427600 Zero coupon bonds
EDV $425.12 M 425117000 Zero coupon bonds
ETF.com Grade as 03/16/17
Fixed Income: U.S. Government Treasury Long-Term
ETF.com Efficiency Insight
TLO, TLH and TLT win top honors in Efficiency for their reasonable expense ratios and tight tracking performances. That said, all five funds charge reasonable fees: The expense ratios here
“tracking error separates the best from the rest” range from 12 to 15 bps. Rather, it is tracking error that separates the best from the rest.
EDV and ZROZ track their respective index well on a median basis but have shown significant variability. To put things in context, tracking volatilities can be a result of different timing and pricing sources in pricing NAVs and pricing indexes. Due to long duration, a small difference in prices can lead to a wide wedge between the fund and its index.
The funds in this segment are all well-established, with little to no risk of closure. TLT is by far the most popular, with more than $5B in AUM. TLH is the second largest fund, with over $300M, and the remaining three funds each has at least $50M. They are also, for the most part, managed well from a tax perspective. (Insight updated 03/24/17)
ETF.com Tradability Insight
TLT is by far the most liquid ETF in its segment: The fund trades over $800M on most days and is among the most liquid US-listed ETFs on the market. TLT’s high daily volume is
“TLT is among the most liquid US-listed ETFs on the market” accompanied by extremely tight spreads. Traders large and small should have no issue executing trades at fair prices.
The remaining ETFs aren’t nearly as liquid as TLT, but can still be traded fairly at the retail level with some effort. Although the average spreads range from TLH’s 5 bps to ZROZ’s 34 bps, none of the spreads should be prohibitive for longer term investors. Additionally, all four funds trade more than $1M on most days, leaving room to get in and out. Still, trading costs matter here given the similarity in the funds’ fees.
It is always a good idea to shop around for the best price or enlist the issuer’s capital markets desk for help finding the best execution for large orders. (Insight updated 03/24/17)
ETF.com Fit Insight
The five ETFs in this segment define “long-term” Treasurys differently, and thus hold different portfolios. TLO, like our benchmark, holds bonds that are due to mature in 10-30
“TLO captures the broad market best” years. In contrast, TLH only holds bonds that mature in the next 10-20 years—a smaller slice of that market. The last three funds—TLT, EDV and ZROZ—only hold longer-dated bonds. TLT holds bonds expiring in at least 20 years; EDV holds Treasury STRIPS expiring in the next 20-30 years; and ZROZ holds zero-coupon bonds with remaining maturities of 25 years or more.
TLO captures the broad market the best, since it invests across the entire long-term Treasurys spectrum. In comparison, TLH has a much lower weighted average maturity: 14 years compared with TLO’s 25 years. Unsurprisingly, it also comes with a lower effective duration and lower yield.
TLT, EDV and ZROZ hold longer-term bonds, with higher durations and higher yields. TLT and ZROZ have the longest weighted average maturities, over 27 years, though EDV’s average maturity, at 25 years, is still high. However, ZROZ’s and EDV’s zero-coupon bond portfolios have much longer durations: 29 and 27 years, respectively, compared with TLT’s 18 years. ZROZ and EDV each have higher volatility than their coupon-paying peers—they soar when rates drop and crash when rates rise.
Presumably any investor in this space wants some level of interest rate risk, or at least is willing to bear it for the yield. The choice here boils down to how “long term” you want your long-term Treasury exposure to be and how much interest rate risk you’re willing to take on. (Insight updated 03/24/17)