BlackRock has launched a new fixed income ETF providing exposure to Treasury STRIPS at the far end of the maturity spectrum.
The ETF provides exposure to STRIPS derived from the principal portion of long-term US Treasury bonds.
The iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ US) has listed on Cboe BZX Exchange.
STRIPS, an acronym for Separate Trading of Registered Interest and Principal of Securities, are effectively zero-coupon bonds that were created by splitting up the interest and principal payments of a conventional fixed-rate bond and selling these components separately.
The fund is linked to the ICE BofA Long US Treasury Principal STRIPS Index which consists exclusively of STRIPS derived from the principal portion of US Treasury bonds with at least $1 billion in outstanding face value and more than 25 years remaining until final maturity.
The index has an average yield to maturity of 1.44% and an effective duration of 27.07 years.
Due to the heightened sensitivity of long-term zero-coupon bonds to changes in interest rates, the ETF will likely appeal to investors who anticipate that effective US interest rates will fall further or remain lower for longer than the market is pricing in.
US interest rates are, of course, effectively sitting at zero; however, a recent change to Federal Reserve policy, which allows inflation to run above its 2% target, implies that interest rates could remain lower for longer.
The ETF comes with a net expense ratio of 0.07% due to a contractual fee waiver in place until at least October 2021. The fund’s gross expense ratio is 0.15%.
PIMCO offers an ETF that tracks the same index – the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (ZROZ US). This ETF houses $500 million in assets under management and comes with an expense ratio of 0.15%.
The largest ETF in the space, however, is the $1.9bn Vanguard Extended Duration Treasury ETF (EDV US) which also costs 0.07%. EDV tracks the Bloomberg Barclays Capital Treasury STRIPS 20-30 Year Equal Par Bond Index which consists of principal STRIPS from US Treasuries with maturities between 20 and 30 years. The index is currently yielding 1.5% and has an effective duration of 24.7 years.