ZROZ Anything But A Zero

July 25, 2012

ZROZ, Pimco’s long-term Treasury ETF, has been on a face-ripping 75 percent-plus tear over the past year. What is going on, and can it last?


The performance of the Pimco 25+ Year Zero Coupon U.S. Treasury ETF (NYSEArca: ZROZ) is no stranger to the top-performing ETF list. It was, after all, the highest returning ETF in all of 2011.

Even more interesting is that ZROZ, a fund with $185 million, more than doubled the performance of the much more widely held $3.76 billion iShares long-term Treasury ETF, the iShares Barclays 20+ Year Treasury Bond Fund (NYSEArca: TLT), which is up 37 percent over the past year.

The only other fund that comes close to ZROZ’s performance over the past 12 months is the Vanguard Extended Duration ETF (NYSEArca: EDV), which has jumped by two-thirds in the past year.

So is the past prologue? What is the outlook for this red-hot fund and, by extension, Treasurys?


A year ago, conventional wisdom dictated that you’d be crazy to invest in the long end of the Treasury curve, because rates were so low they couldn’t possibly go much lower.

But thanks to heightened global instability and Federal Reserve Chairman Ben Bernanke’s “Operation Twist,” the long end of the Treasury curve did go lower and the “crazies” have been rewarded handsomely. The Fed program involves buying long-dated Treasurys accompanied by its selling of shorter-dated holdings, which together mean the U.S. central bank isn’t enlarging its balance sheet.

ZROZ’s outperformance, relative to TLT, can be attributed to the duration of the fund. Duration is a measure of a fixed-income security’s sensitivity to changes in the interest-rate or inflation outlook—the longer the duration, the more a bond’s price will move as rates shift.

ZROZ has greater duration compared with TLT for two reasons. First, ZROZ is further out on the Treasury curve than TLT, as it selects securities with maturities over 25 years. TLT selects securities with 20 or more years to maturity.


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