Investing in Long-Term Bond ETFs

Investors seeking to diversify their portfolios and balance risk often turn to bonds, which offer lower volatility than stocks and provide a steady stream of income. While individual bonds can be a good investment, they can be expensive and difficult to trade. Long-term bond ETFs offer an attractive alternative, providing exposure to a broad range of bonds with lower costs and greater liquidity.

What Are Long-Term Bond ETFs?

Long-term bond exchange-traded funds (ETFs) invest primarily in bonds with long maturities, typically 10 years or more. These ETFs hold a basket of bonds and trade on an exchange, like stocks. They can provide exposure to a variety of issuers and sectors, including corporate bonds, government bonds and mortgage-backed securities.

How do Long-Term Bond ETFs Work?

Long-term bond ETFs use a passive investment strategy to track an index of bonds with long maturities. The ETF manager purchases the underlying bonds and holds them in a portfolio, aiming to replicate the performance of the index. When investors buy or sell shares of the ETF, the ETF manager creates or redeems shares by buying or selling the underlying bonds.

Benefits of Long-Term Bond ETFs

There are several benefits to investing in long-term bond ETFs. Let's take a closer look at some of them.

Diversification

Long-term bond ETFs offer exposure to a broad range of bonds, providing diversification across issuers, sectors and credit quality. This diversification can help reduce risk by spreading investments across multiple bonds, rather than relying on the performance of a single bond.

Stability

Long-term bond ETFs offer stability by providing a steady stream of income in the form of interest payments. The long-term nature of the bonds held by these ETFs makes them less sensitive to interest rate changes, making them a good choice for investors seeking to minimize risk.

Attractive Yields

Long-term bond ETFs typically offer higher yields than short-term bond ETFs, making them an attractive option for investors seeking income. However, investors should be aware that higher yields come with increased risk, as longer-term bonds are more sensitive to changes in interest rates.

Inflation Protection

Long-term bond ETFs can also provide protection against inflation. As the prices of goods and services increase over time, the income generated by long-term bond ETFs can also increase, providing an inflation hedge.

Liquidity

Long-term bond ETFs are highly liquid, meaning that they can be bought and sold easily on the secondary market. This feature makes them an attractive option for investors who may need to access their funds quickly.

Lower Fees

Long-term bond ETFs generally have lower fees than actively managed bond funds. They are passively managed and do not require the same level of active management as traditional bond funds.

Risks of Long-Term Bond ETFs

While there are great benefits to long-term bond ETFs, there is also risk involved. Here is what you need to know about the risks of investing in this type of asset.

Interest Rate Risk

Long-term bond ETFs are sensitive to changes in interest rates. When interest rates rise, the value of the bonds held by the ETF may decrease, leading to a decline in the ETF's price. Conversely, when interest rates fall, the value of the bonds held by the ETF may increase, leading to a rise in the ETF's price.

Credit Risk

Long-term bond ETFs may hold bonds issued by companies or governments with lower credit ratings, which are more likely to default on their debt obligations. This credit risk can lead to a decline in the ETF's price if one or more of the bonds held by the ETF defaults.

Market Risk

Like all investments, long-term bond ETFs are subject to market risk, which is the risk that the overall market will decline, causing the value of the ETF to decline as well.

Inflation Risk

While long-term bond ETFs can provide protection against inflation, they are still subject to inflation risk. If inflation rises more than expected, the income generated by the ETF may not be enough to keep up with the rising cost of goods and services.

Liquidity Risk

Although long-term bond ETFs are highly liquid, there is still a risk that they may not be able to be sold quickly enough to meet an investor's needs. This risk can be minimized by investing in ETFs with high trading volumes.

Top Long-Term Bond ETFs for Investors

As with any investment, it is important to carefully consider the risks and potential rewards before making any investment decisions. Here are some of the top long-term bond ETFs available to investors.

Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT)

The Vanguard Long-Term Corporate Bond ETF is designed to track the performance of the Bloomberg Barclays U.S. Long Corporate Bond Index. This index is made up of investment-grade corporate bonds with maturities of 10 years or longer. As of January 2022, the fund had an expense ratio of 0.05% and held over $7 billion in assets.

iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT)

The iShares 20+ Year Treasury Bond ETF is designed to track the performance of the ICE U.S. Treasury 20+ Year Bond Index. This index is made up of U.S. Treasury bonds with maturities of 20 years or more. As of January 2022, the fund had an expense ratio of 0.15% and held over $18 billion in assets.

Vanguard Extended Duration Treasury ETF (NYSEARCA: EDV)

The Vanguard Extended Duration Treasury ETF is designed to track the performance of the ICE U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. This index is made up of U.S. Treasury STRIPS with maturities of 20 to 30 years. As of January 2022, the fund had an expense ratio of 0.07% and held over $11 billion in assets.

iShares 10-20 Year Treasury Bond ETF (NYSEARCA: TLH)

The iShares 10-20 Year Treasury Bond ETF is designed to track the performance of the ICE U.S. Treasury 10-20 Year Bond Index. This index is made up of U.S. Treasury bonds with maturities of 10 to 20 years. As of January 2022, the fund had an expense ratio of 0.15% and held over $1 billion in assets.

SPDR Portfolio Long Term Treasury ETF (NYSEARCA: SPTL)

The SPDR Portfolio Long Term Treasury ETF is designed to track the performance of the Bloomberg Barclays U.S. Long Treasury Index. This index is made up of U.S. Treasury bonds with maturities of 10 years or longer. As of January 2022,

Are Long-Term Bond ETFs the Right Investment for You?

Investors may consider diversifying their portfolios and managing risk by investing in bonds, which typically offer lower volatility and a regular income stream compared to stocks. While purchasing individual bonds can be costly and challenging to trade, long-term bond ETFs may be a more cost-effective and liquid option for gaining exposure to a diverse range of bonds. Ultimately, deciding whether to invest in long-term bond ETFs comes down to your investing goals and risk tolerance.

Frequently Asked Questions