Plenty of income-generating asset classes and sectors are benefiting from the Federal Reserve’s refusal to raise interest rates to this point in 2016. The Fed’s “lower for longer” policy is also main reason why fixed income exchange traded funds are among this year’s top asset-gathering funds.
Investors looking to wager that a rate hike is off the table for the foreseeable future can consider longer duration ETFs, including the Vanguard Extended Duration Treasury ETF (NYSEArca: EDV). EDV and the rival PIMCO 25+ Year Zero Coupon US Treasury (NYSEArca: ZROZ) are benefiting because longer-dated bonds are more sensitive to hawkish changes in interest rates, meaning the longer the Fed stands pat, the more compelling the higher yields on these ETFs are because rate risk is diminished.
After the recent lackluster economic numbers, the Fed is pushing off on an interest rate hike, which should help drive the ongoing search for yield. Some market observers have even argued that the Fed may be forced to only raise rates only once this year. In addition, with over $10 trillion in global bonds showing negative yields, foreign investors may continue to dive into U.S. assets like Treasury bonds in search of relatively more attractive yields.
EDV “follows the Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index and has an average duration of 25 years, implying hypersensitivity to changes in interest rates. Separate trading of registered interest and principal securities (STRIPS), are bonds that sell at discounts to par value, meaning there are no interest payments,” according to InvestorPlace.