Declining interest rates are boosting a slew of long-dated fixed income segments and ETFs, including the Vanguard Long-Term Bond ETF (NYSEArca: BLV). BLV is up 13.40% year-to-date, a stellar return when considering the fund is heavily allocated to U.S. government debt.
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 15.7-year duration and a 3.42% 30-day SEC yield.
“The fund’s long duration, which is currently 15 years, introduces considerable interest-rate risk. Just over 77% of the portfolio was invested in securities with effective maturities of 20 years or more at the end of June 2019. The fund’s duration is about two years longer than the long-term bond category average. It offers a slightly higher yield than its typical peer as compensation for this risk,” according to Morningstar.
Said another way, the primary risk with BLV is interest rate risk, not credit risk. In terms of credit quality, the Vanguard fund allocates more than two-thirds of its weight to bonds rated between AAA and A.
Betting On BLV
“While the fund’s interest-rate risk is high, its credit risk is low,” said Morningstar. “It only invests in investment-grade bonds while its category peers, on average, allocate about 7% of their assets to below-investment-grade securities. Market-cap-weighting tilts the portfolio toward Treasury bonds, which currently make up roughly 43% of the portfolio, compared with the category average of 16.5%. These high-credit-quality holdings have helped the fund outperform during market downturns, including the global financial crisis and Greek debt crisis.”
As is to be expected with Vanguard ETFs, BLV is inexpensive. The fund charges just 0.07% per year or $7 on a $10,000 investment.
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.
“This fund has the longest duration in the category, exposing investors to considerable interest-rate risk, though it does compensate with a higher yield than funds with lower duration and similar credit risk. At the end of June 2019, bonds with effective maturities of 20 years or longer made up more than three-fourths of the portfolio, lengthening the portfolio duration,” according to Morningstar.
The research firm has a Silver rating on BLV.
For more information on the fixed-income market, visit our bond ETFs category.
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.