Those who are worried about the knock-on effects of inflation in the coming years may lean towards Treasury Inflation Protected Securities, or TIPS. The PIMCO 15+ Year US TIPS Index ETF (LTPZ) is an index-based ETF that owns inflation-protected Treasury bonds with an effective duration of 22.10 years. That’s roughly three times the 7.5-year effective duration of the well-known iShares TIPS Bond ETF (TIP), which has over $24 billion under management.
LTPZ is going to have far wider price swings than TIP on a comparative basis. It will also be far more sensitive to the step up of inflationary metrics that would act as a tailwind for this group.
There are also long-duration options available in the investment grade corporate bond sector as well. The iShares 10+ Year Investment Grade Corporate Bond ETF (LLQD) and Vanguard Long-Term Corporate Bond ETF (VCLT) are two solid options for investors to choose from. Both offer exposure to a diverse basket of high quality corporate bonds with a minimum of 10 years until maturity.
LLQD sports an effective duration of 13.68 years, although the weighted average maturity of the bonds in the portfolio are nearly 24 years. The embedded expenses in these funds are quite low as well.
The Bottom Line
Long duration bond funds may seem like a maximum risk proposition in the current interest rate environment. Nevertheless, these tools offer investors liquid and diversified exposure to a subset of the fixed-income market for those who are looking for a retracement in Treasury yields.
This article was republished with permission from FMD Capital.