ETF Spotlight on PIMCO 25+ Year Zero Coupon Treasury (NYSEArca: ZROZ), part of a weekly series.

Assets: $19.8 million

Objective: Tracks the Bank of America Merrill Lynch Long U.S. Treasury Principal STRIPS Index

Holdings: 100% of this fund is invested in Government bonds dated 20 years or more

What You Should Know

  • Dividend payments and rebalancing occur quarterly
  • Zero coupon bonds have different maturities, anywhere from one year to 40 years
  • STRIPS – Separate Trading of Registered Interest and Principal of Securities – are U.S. Treasuries that have been separated so that the principal and interest are two separate securities
  • More points about zero coupon bonds, courtesy of ETF Guide, are that: they’re issued at deep discounts and redeemed at face value; taxes are due annually on interest payments; they tend to be more volatile than conventional bonds; and they’re more sensitive to interest rate changes
  • One of the biggest risks of zero coupon bonds is that the coupon at maturity could be less than inflation, and longer-dated bonds will take a bigger hit
  • The biggest pro for zero coupon bonds is the discount to par that they offer
  • The yield to maturity on ZROZ is 4.43%

For past ETF Spotlights, visit our ETF Spotlight page.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.