ZROZ, Long Bond ETFs Lead Fixed-Income Performance
Rate-sensitive ETFs gain big on falling consumer confidence.
In the last month, long-term bond ETFs such as the PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ) and the Vanguard Extended Duration Treasury ETF (EDV) have outperformed all other fixed-income, exchange-traded funds.
The primary driver of their outperformance has been a decline in long-term Treasury yields, fueled by weakening consumer confidence and expectations of slower economic growth.
As consumer sentiment declines, spending tends to slow, leading to lower economic activity. In response, the bond market anticipates potential rate cuts, causing long-term yields to fall.
Since bond prices move inversely to yields, long-duration bonds—particularly those with high-interest rate sensitivity—have rallied. This dynamic has made rate-sensitive ETFs like ZROZ and EDV some of the best-performing fixed-income investments in 2025.
ZROZ and EDV: Top-Performing Fixed Income ETFs
One-month performance from etf.com Pulse Tool as of Feb. 26, 2025.
Understanding Interest Rate Sensitivity and Long-Term Bonds
Bond prices are directly affected by changes in interest rates, but long-term bonds are much more sensitive to rate movements than short-term bonds. This is because the further out a bond’s maturity date, the greater the impact of discounting future cash flows when rates change. A bond’s duration measures this sensitivity, with higher-duration bonds seeing larger price swings in response to shifts in interest rates.
Bond Duration, Performance Example
A bond with a duration of 2 years might see its price rise by only 2% if interest rates fall by 1%.
A bond with a duration of 25 years, like those in ZROZ and EDV, could see a price increase of around 25% for the same rate drop.
This explains why long-term bond ETFs have surged in recent months, as declining economic sentiment has pushed yields lower. Investors seeking to capitalize on falling rates have increasingly turned to long-duration Treasury ETFs.
How ZROZ and EDV Work
Both ZROZ and EDV provide exposure to long-dated U.S. Treasury bonds, but they have some key differences:
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ)
- Invests exclusively in zero-coupon U.S. Treasury bonds with maturities exceeding 25 years.
- Zero-coupon bonds do not pay periodic interest; instead, they are bought at a discount and mature at face value.
- Has an extremely high duration, making it one of the most rate-sensitive ETFs available.
Vanguard Extended Duration Treasury ETF (EDV)
- Invests in zero-coupon U.S. Treasury bonds with maturities ranging from 20 to 30 years.
- Holds 80 securities, making it more diversified than ZROZ, which holds 20.
- Still highly sensitive to interest rate changes but slightly less volatile than ZROZ.
Who Should Consider Investing in ZROZ and EDV?
While these ETFs have been strong performers recently, they are not suitable for all investors. The ideal investors for long-term bond ETFs include:
- Rate-Sensitive Investors: Those who anticipate a declining interest rate environment and want to benefit from bond price appreciation.
- Portfolio Hedgers: Investors looking to hedge against economic slowdowns or equity market downturns.
- Institutional and Advanced Traders: Given the high volatility, institutional investors and sophisticated retail investors may use these ETFs for tactical positioning.
- Long-Term Allocators Seeking Duration Exposure: Investors with a long investment horizon who want to add interest rate-sensitive assets to their portfolio.
However, these ETFs may not be ideal for:
- Short-Term Investors: Due to their high volatility and sensitivity to interest rate movements, they are not suitable for conservative or short-term-focused investors.
- Investors Expecting Higher Inflation or Rising Rates: If inflation reaccelerates or economic growth picks up, long-duration bonds could see steep losses.
Should Investors Bet on Long-Term Bond ETFs Now?
The recent surge in long-term bond ETFs like ZROZ and EDV has been driven by declining consumer confidence and expectations for slower spending leading to falling interest rates. Given their extreme sensitivity to rate changes, these ETFs have significantly outperformed in recent months.
However, while they offer strong upside potential in a falling rate environment, they come with high volatility and downside risk if yields rise. Investors considering these ETFs should carefully assess their economic outlook, risk tolerance, and portfolio goals before making a decision.
For those expecting continued economic slowdown and potential Fed rate cuts, ZROZ and EDV could continue to be strong performers. But for those concerned about inflation or rate hikes, more balanced fixed-income strategies may be preferable.
As always, investors should conduct thorough research and consider their long-term financial objectives before making investment decisions in long-term bond ETFs.
