Capital markets pondering when and how fast rate cuts come may invoke anxiety in fixed income investors expecting yields to fall. If they’re willing to extend their exposure to higher duration, they can attain the higher yields they seek.
Obtaining more yield doesn’t necessarily mean fixed income investors need to also take on more credit risk. Safe haven Treasury notes with longer maturity dates can offer yields they seek while mitigating credit risk.
“Exchange-traded funds that focus on U.S. Treasury bonds are a simple way to add low-risk investment opportunities to a portfolio,” Morningstar noted. “These funds now come with an added benefit: higher yields without the kind of credit risk that could become a problem during a recession, when bond issuers have a hard time paying back the money they’ve borrowed.”
Given the availability of Treasury ETFs on the market, the question now is, which fund should an investor choose?
EDV Makes the Cut
Morningstar listed five funds that can offer yield opportunities with an extended duration focus. One of the funds making the cut was the Vanguard Extended Duration Treasury Index Fund ETF Shares (EDV ).
As the linked Morningstar article highlighted, the fund features a 30-day SEC yield of just under 4.5% (as of February 8). The average effective maturity date is just under 25 years, confirming its exposure to debt with longer duration.
“Thanks to the Federal Reserve’s aggressive interest rate increases in 2022 and 2023, yields on U.S. Treasury bond funds have been at their highest levels in years,” Morningstar added.
EDV seeks to track the performance of an index of extended-duration zero-coupon U.S. Treasury securities. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index.
This index includes zero-coupon U.S. Treasury securities (Treasury STRIPS), which are backed by the full faith and credit of the U.S. government, with maturities ranging from 20 to 30 years. The fund invests by sampling the index. At least 80% of its assets will be invested in U.S. Treasury securities held in the index.
- Seeks to track the performance of the Bloomberg U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index
- Passively managed using index sampling
- Broad exposure to the long-term Treasury STRIPS market
- Provides current income with high credit quality
- Low 0.06% expense ratio
For more news, information, and analysis, visit the Fixed Income Channel.
