These Former Bond ETF Stars are Getting Smoked

Laggards can become leaders and leaders can morph into laggards. The latter scenario is afflicting two of last year’s top-performing fixed income exchange traded funds.

Conventional wisdom dictates that as Treasury yields rise, longer-dated, high duration bonds, and the funds that hold those bonds, are more vulnerable to those rising yields than their low duration counterparts. Ten-year Treasury yields surging almost 20% over the past month has confirmed as much.

That yield spike is victimizing two of last year’s top-performing bond ETFs: The PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) and the Vanguard Extended Duration Treasury ETF (NYSEArca: EDV).

Last year, ZROZ and EDV surged 48.7% and 44.7%, respectively. This year is a different story for the pair. EDV and ZROZ are each off more than 9% and those losses are accelerating with the pair being off an average of 13.8% over the past month. Those losses are attributable to the zero-coupon bonds the ETFs hold.

Zero-coupon bonds often sell at a sizable discounts to face value because buyers do not get a steady stream of income as they do with traditional bonds. As zero-coupon Treasurys get close to maturity, their value increase with buy-and-hold investors getting the full value of the bond when it matures. [The Scoop on two High-Flying Bond ETFs]