Spotlight ETF: EDV, Vanguard’s Long Term Treasury Fund

The Vanguard Extended Duration Treasury ETF (EDV), an exchange-traded fund designed to provide investors with exposure to long-duration U.S. Treasury bonds, has struggled in 2024 as inflation has pushed rate-sensitive ETF prices lower. 

While 2024 began on a high note for long-dated bond ETFs like EDV and the trader favored iShares 20+ Year Treasury Bond ETF (TLT), high expectations of falling inflation and multiple rate cuts diminished as the year progressed. 

Since bond prices and yields have an inverse relationship, and longer-duration bonds are more rate-sensitive than their short-term counterparts, EDV and TLT have both fallen much more than the broader bond market in 2024 as inflation has remained stickier for longer than expected. 

How Does Vanguard’s EDV Work?

The EDV ETF uses a passive investment strategy, seeking to track the Bloomberg U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index. Managed by Vanguard, the fund primarily invests in zero-coupon bonds, also known as "strips," which do not pay periodic interest but are sold at a deep discount to their face value.  

By investing in these bonds, the ETF amplifies sensitivity to changes in interest rates due to the longer duration of its holdings. Zero-coupon bonds reinvest all interest into their principal value, resulting in a greater price response to interest rate changes compared to bonds that pay regular coupons. 

The Pros and Cons of Investing in EDV

Due to its long-duration focus, EDV can make an effective vehicle for investors aiming to hedge against falling interest rates or achieve significant capital appreciation when rates decline. However, this rate sensitivity can also work in the opposite direction, where hotter-than-expected inflation can push interest rates higher and EDV prices lower. 

Pros of Investing in EDV  

• High Interest Rate Sensitivity: EDV’s long duration makes it a strong performer in declining interest rate environments, offering substantial capital appreciation potential. 
• Diversification: Adding EDV to a portfolio can provide diversification benefits, as long-term Treasuries often perform well during periods of economic uncertainty or equity market downturns.  
• Low Expense Ratio: Vanguard’s reputation for cost efficiency is reflected in EDV’s low expense ratio of 0.06%, making it a cost-effective choice for long-term investors. 

Cons of Investing in EDV 

• Interest Rate Risk: EDV’s extreme sensitivity to interest rate movements can result in significant losses during periods of rising rates. 
• Limited Income: Unlike other Treasury ETFs, EDV’s focus on zero-coupon bonds means there is no periodic income, which may not suit income-focused investors. 
• Volatility: EDV’s high duration makes it more volatile compared to other Treasury ETFs, which could be unsettling for risk-averse investors. 

Is EDV Right for You?

Investing in EDV is a strategic choice best suited for investors with a strong conviction about future interest rate trends. It’s particularly effective as a hedge against deflation or falling rates. However, its high volatility and lack of periodic income make it less ideal for conservative investors or those seeking steady cash flows. Understanding how EDV fits within your overall investment strategy is crucial before committing capital to this unique ETF.