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The Popularity Of Treasury Bond ETFs: Investor Fear Or Federal Reserve Intervention?

27 April 2012 at 1:36 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

The iShares 20+ U.S. Treasury Bond Fund (TLT) has often exhibited wider daily trading swings than the S&P 500 SPDR Trust (SPY). This quirk alone has made it difficult for me to embrace the long end of the treasury bond curve.

Instead, I’ve been more apt to stick with intermediate¬†investment grade corporate credit, as well as short-term and long-term high yield corporate bonds. Granted, governments and central banks can print paper or create an electronic equivalent out of thin air. Yet corporate¬†balance sheets also¬†benefit¬†when a¬†central bank pursues an “easy money” policy.

Indeed, virtually all of the Income ETFs in my client portfolios have been successful producers. Even as capital appreciators, each sits at or near 52-week highs. I am talking about vehicles like iShares Intermediate Corporate Credit (CIU), Guggenheim BulletShares 2015 High Yield Corporate (BSJF) and SPDR Barclay High Yield Bond (JNK). I am also talking about taxable account winners like PowerShares National Muni (PZA), as well as opportunistic purchases like Guggenheim Multi-Asset Income (CVY) and PowerShares CEF Income (PCEF).

I’ve been exceptionally pleased by the low-risk/reasonable reward¬†associated with the above-mentioned income producers.¬†And yet, I freely acknowledge having underestimated the¬†ongoing appeal of¬†treasuries.

Earlier, I mentioned one reason that I¬†avoided¬†them… volatility at the long-end of the curve. Secondly, I¬†imagined that price gains for the ETFs would be limited by¬†record low yields. What’s more, any sign of inflation, above-anticipated economic growth, foreign government reluctance to acquire double-A-rated¬†sovereign debt¬†and/or a change in¬†Federal Reserve monetary policy could have adverse effects on the asset class.¬†

Equally compelling,¬†the CBOE VIX Volatility (VIX) relative to the S&P 500 SPDR Trust (SPY) has¬†trended lower for 7 months. With the fear in the “fear gauge” waning and with stock assets gaining,¬†wouldn’t it be reasonable to expect that investors would¬†leave Treasury Bond ETFs and shift¬†into Stock ETFs?

VIX-SPY Ratio

Reasonable analysis or not, Treaury Bond ETFs like iShares 7-10 Year Treasury (IEF) are sitting near 52-week highs. In other words, buyers of safe haven assets are as dedicated as risk-on purchasers of S&P 500 stock assets. Maybe more so!

With the CBOE VIX Volatility near 52-week lows and the S&P 500 near 52-week highs, it may be difficult to pin the reason for treasury bond popularity on investor fear. Equally likely, investors are buying what the Federal Reserve is buying; that is, if the central bank is purchasing shares in the middle of the curve, maybe you should too. It has been both profitable and safe.

Regardless of why U.S. Treasury Bond ETFs are popular — whether investors are “following the Fed,” avoiding stocks, or embracing non-European sovereign debt — the uptrend remains intact. And for some folks… nothing else matters.

IEF 200

You can listen to the ETF Expert Radio Show ‚ÄúLIVE‚ÄĚ, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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