1. Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ | C-55)
Total return: +22.31 percent; Effective duration: 29.45 years
Similar to EDV, ZROZ hunts in the STRIPS space. However, it extends its duration exposure by holding STRIPS with at least 25 years remaining in maturity. It is a super-charged duration play.
While ZROZ has had an impressive run in the first half of 2014, things can turn ugly rather quickly when yields start to normalize from historical lows. Consider that it was massacred in the second half of 2013 when the market reacted violently to the Federal Reserve’s tapering of quantitative easing policy. It lost 10.05 percent then.
As a final note, it’s clear that duration is and continues to be one of the major drivers in the performance of fixed-income ETFs. It is also a double-edged sword that can significantly hurt a fixed-income ETF.
At the time this article was written, the author held no positions in the securities mentioned. Contact Howard Lee at [email protected].