ETF Trends
ETF Trends

The Vanguard Long-Term Bond ETF (NYSEArca: BLV) has added nearly $759 million in new assets this year, indicating that some advisors and investors are betting the Federal Reserve might have to delay raising interest rates even longer, which could be a boon for longer duration fixed income exchange traded funds.

BLV tracks the Barclays U.S. Long Government/Credit Float Adjusted Index, to exposure to a range of investment-grade government and corporate debt securities. BLV has a 14.7 year duration and a 4.08% 30-day SEC yield. BLV is down 3.1% year-to-date but generated an average annualized return of 6.1% over the past five years. The ETF also comes with a cheap 0.10% expense ratio.

That expense ratio is well below that of active fixed income mutual funds and BLV is likely to deliver better performance as recent data suggest some active bond managers are struggling to beat their benchmarks.

Active managers, who had a finger on the market pulse, could have diminished their bond fund durations to diminish the risk of rising rates. Meanwhile, index-based ETFs with a set target strategy cannot shift duration exposure to limit interest rate risks.

However, according to S&P Dow Jones Index Versus Active (SPIVA) research, over the one-year period ended June 2015, nine in ten active fixed-income mutual funds underperformed the Barclays benchmark index.

Additionally, a paltry 1.2% of government long funds outperformed the Barclays Long Government index over the past one-year period, and only 15% outperformed the benchmark in a five-year period. [Active Fund Aches: Are Passive ETFs More Profitable?]

“Some investors may expect yields to increase, but I doubt the Federal Reserve can pull that rabbit out of the hat when other countries have lower rates. An increase in domestic rates would result in a surge of cash inflows to the U.S. as foreign investors would seek dollars to buy up the higher yielding treasury securities. The resulting appreciation of the dollar would slam domestic employment and contradict one of the two dual mandates of the Federal Reserve. Until we see some major changes in the world economy, 4.2% is a fairly reasonable yield,” according to a Seeking Alpha post.

Long-term Treasuries have strengthened and yields dipped on the continued decline in oil prices helped push down inflationary pressures. Meanwhile, short-term Treasury yields have been anchored as speculators bet on a slow interest rate hike from the Federal Reserve.

Vanguard Long-Term Bond ETF

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.