Long-term Investment Strategy for U.S. Treasury ETFs: Opportunities in the Rate Cut Era

Considering recent economic trends and Federal Reserve movements, the anticipated federal funds rate cut starting this September could present a significant opportunity for U.S. Treasury ETF investors. Let's examine the investment strategy focusing on three major ETFs: TLT, EDV, and ZROZ.

1. Relationship between Interest Rates and Bond Prices

• The attached graph shows the 10-year and 30-year U.S. Treasury yields (dotted lines) and ETF prices (solid lines) over the past five years.

• The inverse relationship between yield (interest rate) decrease and ETF price increase is clearly evident.

2. Concept and Importance of Duration

• Duration is a crucial concept in bond investment, indicating the sensitivity of bond prices to interest rate changes.

• Simply put, Duration shows how much the bond price changes in percentage terms when interest rates change by 1%.

• For example, a bond with a Duration of 10 years will see its price increase by about 10% if interest rates fall by 1%.

• Higher Duration means greater price volatility in response to interest rate changes.

• Duration information provided (as of August 11, 2024):

* TLT: 16.58 years

* EDV: 24.1 years

* ZROZ: 26.99 years

• This means ZROZ is most sensitive to interest rate changes, while TLT is relatively less sensitive.

3. Analysis of ETF Characteristics

a) TLT (iShares 20+ Year Treasury Bond ETF)

• With a Duration of 16.58 years, it's the most stable among the three ETFs

b) EDV (Vanguard Extended Duration Treasury ETF)

• Duration of 24.1 years, higher than TLT, suggesting greater price volatility potential

• Higher profit potential than TLT when interest rates fall

c) ZROZ (PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF)

• Highest Duration at 26.99 years, most sensitive to interest rate changes

• Highest profit potential when interest rates fall, but also highest risk

• Example: If interest rates fall by 1%, ZROZ's price could rise by about 27%

  
  

4. Investment Strategy

• Selection based on risk preference:

* Conservative investors: TLT (relatively stable price movements)

* Aggressive investors: ZROZ or EDV (high profit potential with high risk)

• Diversification: Combine the three ETFs to adjust risk

• Regular rebalancing: Adjust portfolio based on changing market conditions

5. Precautions

• Uncertainty in timing and extent of interest rate cuts

• Need for continuous monitoring of economic indicators and Federal Reserve statements

• Maintain a long-term investment perspective: Don't be swayed by short-term volatility

• Recognize that ETFs with higher Duration also carry higher risk of significant losses if interest rates rise

  
  

Conclusion: The anticipated interest rate cut cycle could present a good opportunity for U.S. Treasury ETF investors. It's crucial to understand the Duration concept and recognize the characteristics of each ETF to choose a strategy that fits your investment style. Consider the potential returns and risks associated with interest rate changes in a balanced manner, while maintaining a long-term perspective and keeping an eye on market conditions.