2023 has been marked by a return to bond exchange traded funds (ETFs) despite continued hawkishness by the U.S. Federal Reserve. Short-term bond funds have been a default option amid tightening monetary policy, but now, long-term debt could be back in the fold.
Long-term debt provides investors with the option of obtaining more yield, but with that extra dose of yield comes interest rate risk. With the way the Fed has been hiking rates for the past year and a half, short-term debt has been the primary option for fixed income investors. However, that narrative could be changing.
“Investors loading up on long-term bonds have history at their back,” Bloomberg reported. While the Fed maintains its hawkishness regarding rate hikes in the near-term horizon, the expectation is that rates won’t stay high for much longer, paving the way for investors to reconsider long-term debt again.
If history repeats itself, then long-term bonds could offer prime value in the current market environment.
“For decades, Treasuries maturing in 10 or more years have consistently outperformed shorter-dated sectors immediately following the last in a series of interest-rate increases by the Federal Reserve,” Bloomberg added. “On average, they returned 10% over six months after the fed funds rate peaked.”
Bond ETFs in general have been seeing investor interest again, which is a welcome sign after 2022’s bear market. The result is the bond ETF market attaining record valuations.
“The market for exchange-traded funds that invest in bonds is booming – the total value of such plans have just surged past $2 trillion to a new record,” a Markets Insider article said. “It took the bond ETF industry, which came into existence in 2002, as many as 17 years to reach its first $1 trillion, but it saw the amount double in just 4 years, according to VettaFi, a firm that specializes in asset-management data and analytics.”
A Long-Term ETF Solution
Fixed income investors seeking long-term debt in the safe confines of U.S. Treasury notes can consider the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT). The fund seeks to track the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Long Treasury Bond Index.
This index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years. The fund comes with a low 0.04% expense ratio and a 30-day SEC yield of 4.06% as of July 13.
For more news, information, and analysis, visit the Fixed Income Channel.