New iShares 25+ Year Treasury ETF

[vineviz]

FYI, iShares is launching a new ETF to compete with Vanguard Extended Duration Treasury ETF (EDV) and PIMCO 25+ Year Zero Coupon US Treasury ETF (ZROZ).

The iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ) will have an expense ratio of 0.07%.

https://www.etf.com/sections/daily-etf- ... strips-etf

[indexfundfan]

That's an improvement over it's other treasury ETFs with ER 0.15%.

[occambogle]

I guess it's always good to have alternatives but I can't see any advantage over the well-established EDV at the moment. I wonder if there will be any differences compared to EDV, for example precise duration, that might enable it to be used as a tax-loss harvesting partner though...

[Tingting1013]

I guess it's always good to have alternatives but I can't see any advantage over the well-established EDV at the moment. I wonder if there will be any differences compared to EDV, for example precise duration, that might enable it to be used as a tax-loss harvesting partner though...

EDV and ZROZ track slightly different indicies, and ZROZ has done slightly better than EDV since inception:

https://www.portfoliovisualizer.com/fun ... chmark=EDV

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

[occambogle]

EDV and ZROZ track slightly different indicies, and ZROZ has done slightly better than EDV since inception:

https://www.portfoliovisualizer.com/fun ... chmark=EDV

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

Interesting, thanks! So would you say EDV-ZROZ and EDV-GOVZ are legitimate TLH partners (substantially different) but that ZROZ-GOZ would not be?

[whodidntante]

One can consider leveraging this into some sort of excellent adventure, though it may become a bogus journey and then you'll have to face the music.

[Tingting1013]

EDV and ZROZ track slightly different indicies, and ZROZ has done slightly better than EDV since inception:

https://www.portfoliovisualizer.com/fun ... chmark=EDV

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

Interesting, thanks! So would you say EDV-ZROZ and EDV-GOVZ are legitimate TLH partners (substantially different) but that ZROZ-GOZ would not be?

That is my thought but I am not the IRS

[Ketawa]

I guess it's always good to have alternatives but I can't see any advantage over the well-established EDV at the moment. I wonder if there will be any differences compared to EDV, for example precise duration, that might enable it to be used as a tax-loss harvesting partner though...

EDV and ZROZ track slightly different indicies, and ZROZ has done slightly better than EDV since inception:

https://www.portfoliovisualizer.com/fun ... chmark=EDV

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

ZROZ outperformance over EDV would likely be due to higher duration, as its Treasuries are all at least 25 years maturity, while EDV is 20-30 years.

[drk]

That's an improvement over it's other treasury ETFs with ER 0.15%.

Same management fee, but with a fee waiver for 0.08% of it. They set their sights on EDV.

[texasfight]

EDV and ZROZ track slightly different indicies, and ZROZ has done slightly better than EDV since inception:

https://www.portfoliovisualizer.com/fun ... chmark=EDV

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

Interesting, thanks! So would you say EDV-ZROZ and EDV-GOVZ are legitimate TLH partners (substantially different) but that ZROZ-GOZ would not be?

That is my thought but I am not the IRS

Yes IMO this is great news that it tracks a different index than EDV.

We will see if it gets more liquidity than ZROZ.

[vineviz]

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

Also BlackRock typically does a much better job of ensuring that market makers support the iShares ETFs than PIMCO typically does.

The average bid/ask spread on ZROZ over the past 45 days is 0.41%, which is forty times higher than the 0.01% spread on iShares 20+ Year Treasury Bond ETF (TLT) 0.01% and over four times higher than the 0.09% spread on EDV.

If iShares can get the spread on GOVZ down below 0.09%, it should be clearly preferable to both EDV and ZROZ.

[texasfight]

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

Also BlackRock typically does a much better job of ensuring that market makers support the iShares ETFs than PIMCO typically does.

The average bid/ask spread on ZROZ over the past 45 days is 0.41%, which is forty times higher than the 0.01% spread on iShares 20+ Year Treasury Bond ETF (TLT) 0.01% and over four times higher than the 0.09% spread on EDV.

If iShares can get the spread on GOVZ down below 0.09%, it should be clearly preferable to both EDV and ZROZ.

What is surprising to me is the quality of execution I get on a ZROZ trade when I do a market order.

[Tingting1013]

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

Also BlackRock typically does a much better job of ensuring that market makers support the iShares ETFs than PIMCO typically does.

The average bid/ask spread on ZROZ over the past 45 days is 0.41%, which is forty times higher than the 0.01% spread on iShares 20+ Year Treasury Bond ETF (TLT) 0.01% and over four times higher than the 0.09% spread on EDV.

If iShares can get the spread on GOVZ down below 0.09%, it should be clearly preferable to both EDV and ZROZ.

Yes but not the whole story.

EDV has a sordid history of distributing capital gains while ZROZ has never done so. Unclear whether that is due to the index or Vanguard’s incompetence.

[azanon]

The last time the prime interest rate was lower than it is today (3.25%) was August 3, 1955. Takes a lot of guts to buy these now, or at least a portfolio designed to counterbalance the interest rate risks involved here.

[Day9]

What is so bad about buying individual STRIPS to save the small expense ratio and customize your exposure?

In taxable, I hear you must report "phantom interest". I would please like to ask: If you own individual STRIPS in a Vanguard taxable brokerage account, do they do this calculation for you and are you able to import seamlessly into software like TurboTax, the way you are with real coupons from non-stripped long term treasury bonds? Or is there an extra tax headache?

[grabiner]

EDV has a sordid history of distributing capital gains while ZROZ has never done so. Unclear whether that is due to the index or Vanguard’s incompetence.

Capital gains on taxable bond funds are usually advantageous to taxable shareholders. When a fund buys a bond, it must make future income distributions based on the yield to maturity at the time the bond was bought. If a bond's yield falls, the fund can either sell the bond for a capital gain and replace it with bonds that make taxable distributions at the new lower yield, or hold the bond and pay out higher distributions taxed as ordinary income.

Most investors would prefer having the lower-taxed capital gain now, rather than the higher-taxed ordinary income in future years, particularly if they have capital losses to offset the capital gain.

(The situation with munis is different. A capital gain on a muni is an almost-complete loss to the investor, who pays tax and gets less tax-exempt income in the future.)

[vineviz]

What is so bad about buying individual STRIPS to save the small expense ratio and customize your exposure?

I wouldn't say there is anything bad about buying individual STRIPS but it might not be preferable for any number of reasons.

For instance, some brokers still charge high enough commissions on the purchase and sale of STRIPS that the fund is actually cheaper. My broker, for instance, charges $1 per $1,000 bond with a minimum commission of $35. Even assuming a bid/ask spread of 0.0%, an investor would need a minimum of $100,000 allocated to a 5-year rolling STRIPS ladder to get an expense ratio lower than EDV or GOVZ. And executing small transactions for rebalancing, etc. is prohibitively expensive and perhaps laborious (I can't buy or sell bonds online: I have to call my broker).

I know my broker is particularly heinous when it comes to bonds, but it's one reason I'll probably use EDV/ZROZ/GOVZ instead of purchasing individual STRIPS unless I'm purchasing them with an intent to hold until maturity.

[XacTactX]

What is so bad about buying individual STRIPS to save the small expense ratio and customize your exposure?

In taxable, I hear you must report "phantom interest". I would please like to ask: If you own individual STRIPS in a Vanguard taxable brokerage account, do they do this calculation for you and are you able to import seamlessly into software like TurboTax, the way you are with real coupons from non-stripped long term treasury bonds? Or is there an extra tax headache?

The form for this type of interest is 1099-OID and it should be included in the brokerage packet that you receive. It's pretty easy to enter, it's similar to a 1099-DIV or something like that. If anyone owns EDV or another STRIPS fund they can chime in with a more direct answer.

EDIT I just realized you want to know about buying individual STRIPS. The tax form would be 1099-OID but I have no idea if the issuer of the bond will compute the interest and send one automatically

[NoRegret]

EDV bid/ask spread can be pretty wide, if this is narrower I may use it more.

The conspiracy theorist in me wonders if this makes it easier to do yield curve control at the long end in the future.

[boglerdude]

> this makes it easier to do yield curve control at the long end in the future.

what does this mean

[AZAttorney11]

Always glad to see more competition. Long-term Treasuries have had a rough few weeks, so the new offering from iShares might provide a tax-loss harvesting opportunity.

[anon_investor]

Always glad to see more competition. Long-term Treasuries have had a rough few weeks, so the new offering from iShares might provide a tax-loss harvesting opportunity.

Let's hope it has enough volume to be useful.

[occambogle]

Let's hope it has enough volume to be useful.

Average volume so far is 300-400 units a day.... which is tiny, but of course it is early days... I like the concept, but wouldn't want to use this until volume is a LOT larger.

[anon_investor]

Let's hope it has enough volume to be useful.

Average volume so far is 300-400 units a day.... which is tiny, but of course it is early days... I like the concept, but wouldn't want to use this until volume is a LOT larger.

HAHA, 1 BH could easily shift the market on this ETF, haha.

[occambogle]

Let's hope it has enough volume to be useful.

Average volume so far is 300-400 units a day.... which is tiny, but of course it is early days... I like the concept, but wouldn't want to use this until volume is a LOT larger.

HAHA, 1 BH could easily shift the market on this ETF, haha.

That said... isn't the theory that a market-maker can create an ETF of this at will, and as contents (i.e. LTT) are super-liquid, the theory should be that there should be no issue buying/selling these. But I'll stick with EDV for now.

[grabiner]

Let's hope it has enough volume to be useful.

Average volume so far is 300-400 units a day.... which is tiny, but of course it is early days... I like the concept, but wouldn't want to use this until volume is a LOT larger.

HAHA, 1 BH could easily shift the market on this ETF, haha.

That said... isn't the theory that a market-maker can create an ETF of this at will, and as contents (i.e. LTT) are super-liquid, the theory should be that there should be no issue buying/selling these. But I'll stick with EDV for now.

With the daily volume so much less than the size of a creation unit, the creation/redemption might be a bit more expensive. It will take a market maker a long time to be short enough shares to make up a creation unit. ETF.com says that the average spread is 0.25%, versus 0.09% for EDV.

[vineviz]

Let's hope it has enough volume to be useful.

Average volume so far is 300-400 units a day.... which is tiny, but of course it is early days... I like the concept, but wouldn't want to use this until volume is a LOT larger.

I'm always interested in seeing how my broker and the market makers handle ETFs like this, so as a test I just (10/06/2020 1:47:30 PM ET) bought 321 shares of GOVZ to see how it went.

When I entered the order the bid was $23.87 and the ask was $23.90. I used a limit of $23.93 to make sure I didn't use more cash than I had in the IRA, and the order took a little less than a minute (about 50 seconds) to execute. All 321 shares executed at $23.90, so no price improvement.

[anon_investor]

Let's hope it has enough volume to be useful.

Average volume so far is 300-400 units a day.... which is tiny, but of course it is early days... I like the concept, but wouldn't want to use this until volume is a LOT larger.

I'm always interested in seeing how my broker and the market makers handle ETFs like this, so as a test I just (10/06/2020 1:47:30 PM ET) bought 321 shares of GOVZ to see how it went.

When I entered the order the bid was $23.87 and the ask was $23.90. I used a limit of $23.93 to make sure I didn't use more cash than I had in the IRA, and the order took a little less than a minute (about 50 seconds) to execute. All 321 shares executed at $23.90, so no price improvement.

At least today according to yahoo finance the daily volume is over 9000.

[vineviz]

At least today according to yahoo finance the daily volume is over 9000.

When I submitted my order, the volume so far was only 106 shares. It looks like some larger blocks traded in the last hour or two.

[rich126]

Let's hope it has enough volume to be useful.

Average volume so far is 300-400 units a day.... which is tiny, but of course it is early days... I like the concept, but wouldn't want to use this until volume is a LOT larger.

I'm always interested in seeing how my broker and the market makers handle ETFs like this, so as a test I just (10/06/2020 1:47:30 PM ET) bought 321 shares of GOVZ to see how it went.

When I entered the order the bid was $23.87 and the ask was $23.90. I used a limit of $23.93 to make sure I didn't use more cash than I had in the IRA, and the order took a little less than a minute (about 50 seconds) to execute. All 321 shares executed at $23.90, so no price improvement.

For something trading that lightly a spread of 3 cents is tiny. I see much larger spreads on significantly higher volume ETFs. My general rule is to roughly split the difference in the spread and see what happens. Unless the market is strongly rising you can usually get things in the 50-70% range. And in a falling market it doesn't hurt to go under the bid/ask and see if it falls to your level.

But 3 cents on 300 shares is $9 or about 0.15% at the prices you quoted.

[corp_sharecropper]

Volume doesn't equal liquidity. If XYZ's last mark is $100, hasn't traded all day (volume = 0), but there's a 10,000 unit bid of $99.98 and a 10,000 unit ask of $100.02, would anyone say it's illiquid while there's a total $2,000,000 waiting to take/provide shares?

Call it being pedantic but it's easy to show how volume doesn't have to go hand in hand with liquidity, just pointing that out. I would imagine ishares will have enough backing from market makers to ensure there's a completely acceptable level of liquidity during the infancy of this ETF regardless of volume/AUM/popularity at the outset.

Considering what they've managed to do with TLT, IEF, and SHY (pretty much the benchmark ETFs of the the treasury world), I wouldn't be surprised if they catch/exceed EDV/ZROZ.

I would really like to see a competitor emerge for LTPZ (PIMCO long term tips). If for no other reason than put pressure on the expenses.

[AZAttorney11]

Volume doesn't equal liquidity. If XYZ's last mark is $100, hasn't traded all day (volume = 0), but there's a 10,000 unit bid of $99.98 and a 10,000 unit ask of $100.02, would anyone say it's illiquid while there's a total $2,000,000 waiting to take/provide shares?

Call it being pedantic but it's easy to show how volume doesn't have to go hand in hand with liquidity, just pointing that out. I would imagine ishares will have enough backing from market makers to ensure there's a completely acceptable level of liquidity during the infancy of this ETF regardless of volume/AUM/popularity at the outset.

Considering what they've managed to do with TLT, IEF, and SHY (pretty much the benchmark ETFs of the the treasury world), I wouldn't be surprised if they catch/exceed EDV/ZROZ.

I would really like to see a competitor emerge for LTPZ (PIMCO long term tips). If for no other reason than put pressure on the expenses.

This is a very good point. Despite the volume being significantly lower, GOVZ has a smaller spread than EDV at the moment (in real dollars and as a total percentage of one share).

[LiveSimple]

Got some GOVZ, today. Fidelity did not allow the market order as the liquidity was low, so has to have a linnet order.
Let me wait and see, how GOVZ does, in the long run.

[AZAttorney11]

GOVZ will track the same index as ZROZ but at a much lower expense ratio, which will certainly make things interesting.

Also BlackRock typically does a much better job of ensuring that market makers support the iShares ETFs than PIMCO typically does.

The average bid/ask spread on ZROZ over the past 45 days is 0.41%, which is forty times higher than the 0.01% spread on iShares 20+ Year Treasury Bond ETF (TLT) 0.01% and over four times higher than the 0.09% spread on EDV.

If iShares can get the spread on GOVZ down below 0.09%, it should be clearly preferable to both EDV and ZROZ.

I assume you believe this because GOVZ has a longer duration than EDV?

[AZAttorney11]

Got some GOVZ, today. Fidelity did not allow the market order as the liquidity was low, so has to have a linnet order.
Let me wait and see, how GOVZ does, in the long run.

I may be selling some EDV to capture a tax-loss opportunity and using the proceeds to buy GOVZ. I'll add to the volume

[indexfundfan]

5 shares traded as of 12.50pm ET today 10/8/2020.

[LiveSimple]

5 shares traded as of 12.50pm ET today 10/8/2020.

Yesterday gave some volume in trading

[bac_minus_cab]

5 shares traded as of 12.50pm ET today 10/8/2020.

Yesterday gave some volume in trading

I created some volume today

60 shares executed instantly, comparable
bid ask to edv.

[LiveSimple]

5 shares traded as of 12.50pm ET today 10/8/2020.

Yesterday gave some volume in trading

I created some volume today

60 shares executed instantly, comparable
bid ask to edv.

Great, let us keep the needle moving

[cos]

I really hope Direxion builds a 3x daily leveraged ETF on top of GOVZ like they already have with IEF and TLT. I'd cherish the opportunity to replace my large TMF (3x TLT) allocation with a smaller 3x GOVZ allocation.

[LiveSimple]

I really hope Direxion builds a 3x daily leveraged ETF on top of GOVZ like they already have with IEF and TLT. I'd cherish the opportunity to replace my large TMF (3x TLT) allocation with a smaller 3x GOVZ allocation.

Please can you help explain the purpose of the TMD ( 3 X TLT ) in a portfolio, for the returns ? I do see 13.31% for a 10 year annualized returns..
But is this not risky to leverage a long term bond fund ? Trying to understand / learn....

Does this follow the hediefundie tread on leverages

[cos]

I really hope Direxion builds a 3x daily leveraged ETF on top of GOVZ like they already have with IEF and TLT. I'd cherish the opportunity to replace my large TMF (3x TLT) allocation with a smaller 3x GOVZ allocation.

Please can you help explain the purpose of the TMD ( 3 X TLT ) in a portfolio, for the returns ? I do see 13.31% for a 10 year annualized returns..
But is this not risky to leverage a long term bond fund ? Trying to understand / learn....

Does this follow the hediefundie tread on leverages

Yes, precisely. I would never hold leveraged long-term treasuries on their own. I hold TMF exclusively for diversifying and hedging an otherwise overly concentrated leveraged equity portfolio, hence why I mentioned that I'd be happy to shrink my allocation if made possible by a 3x daily leveraged GOVZ-based ETF (thanks to GOVZ's longer duration relative to TLT).

For the record, although initially inspired by HEDGEFUNDIE's Excellent Adventure, I derive my portfolio primarily from the ideas presented in these two threads:

A low-cost 5 fund Boglehead portfolio
by Vineviz

A mean variance framework for portfolio optimization
by Uncorrelated