Long-Term Bond ETFs Prove Durable Despite Fed Rate Hikes

Long duration fixed income exchange traded funds have bee strong performers this year even as the Federal Reserve has boosted interest rates twice. For example,the Vanguard Extended Duration Treasury (NYSEARCA:EDV) is higher by almost 7% year-to-date.

Longer-dated bond funds were seemingly more at risk of a rising rate environment may have been oversold prior to the Federal Reserve’s announcement, which allowed the investments to bounce back once the markets and observers gained a clearer picture on the Fed’s monetary policy.

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.

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.

“EDV’s average effective maturity and duration are almost equal to each other – this means that as a simplifying approximation, we will only need yield data for 25-year Treasury STRIPs, since the Macaulay duration of a zero coupon bond is equal to its maturity,” according to a Seeking Alpha analysis of the ETF.