U.S. Treasury ETFs: What Lies Ahead?

U.S. Treasury yields increased as investors resorted to selling their related bets, driving prices lower, as geopolitical risks seemed to have ebbed after North Korea refrained from conducting another nuclear test on its foundation day. Moreover, damage caused by Hurricane Irma is expected to be much lower than initially expected. Bond prices and yields move inverse to each other.

Geopolitical Risks

On Sep 3, North Korea conducted its sixth nuclear test of a hydrogen bomb, which can be mounted on an intercontinental ballistic missile. Kim Jong-Un’s actions have created quite a stir in the United States and a number of Asian economies (read: Safe Haven Currency ETFs Gain, Dollar Loses Amid Geopolitical Uncertainty).

Although The United Nations (UN) passed fresh sanctions on North Korea on Sep 11, they were too lenient compared to what Nikki Haley, the U.S. ambassador to the UN, had initially proposed. Sanctions were watered down in order to secure China and Russia’s support, as they held veto power on the decision.

Although markets breathed a sigh of relief when the rogue nation did not fire a missile on its foundation day, the North Korean ambassador to the UN did not respond well to the new sanctions. "The forthcoming measures by DPRK (the Democratic Republic of Korea) will make the US suffer the greatest pain it has ever experienced in its history," said Han Tae Song, North Korea's ambassador to the UN.

Hurricane Irma

Per a CNBC article, risk modeling firm AIR Worldwide expects Irma to cause insured losses in the range of $20-$40 billion. This shows a decline from the previous forecast of $15-$50 billion as Irma changed course (read: Irma Aftermath Puts These ETF Areas in Focus).

Hurricanes Irma and Harvey are expected to dent GDP growth in the United States in the short run. Goldman Sachs (NYSE:GS) slashed its GDP growth forecast for the United States by 0.8% for the third quarter of 2017. It now expects GDP to grow 2% in the period.

Moreover, there is high uncertainty with regard to the possibility of further rate hikes by the Federal Reserve owing to the low inflation figures. The markets expect the Fed to announce plans of trimming its $4.5-trillion balance sheet as early as September.

Let us now discuss a few ETFs focused on providing exposure to U.S. Treasuries.

iShares 7-10 Year Treasury Bond (NYSE:IEF) ETF IEF

This fund seeks to provide exposure to intermediate term U.S. Treasury bonds.

With $7.80 billion in AUM, it charges a fee of 15 basis points a year. It has an effective duration of 7.63 years and a weighted average maturity of 8.37 years. The fund has returned 2.10% year to date but has lost 3.36% in a year (as of Sep 12, 2017). IEF currently has a Zacks ETF Rank #3 (Hold) with a High-risk outlook.

iShares U.S. Treasury Bond ETF GOVT

This fund seeks to provide exposure to U.S. Treasury bonds in a wide maturity spectrum.

It has AUM of $5.14 billion and charges a fee of 15 basis points a year. It has an effective duration of 6.07 years and a weighted average maturity of 7.60 years. The fund has returned 2.01% year to date but has lost 1.81% in a year (as of Sep 12, 2017). GOVT currently has a Zacks ETF Rank #3 with a Medium-risk outlook.

Vanguard Intermediate-Term Government Bond ETF VGIT

This fund seeks to provide exposure to U.S. Treasury bonds in the 5-10 years maturity spectrum.

It has AUM of $1.34 billion and charges a fee of 7 basis points a year. It has an average duration of 5.2 years and an average effective maturity of 5.50 years. The fund has returned 1.81% year to date but has lost 1.74% in a year (as of Sep 12, 2017). VGIT currently has a Zacks ETF Rank #3 with a Medium-risk outlook.

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

This fund seeks to provide exposure to longer term U.S. Treasury bonds in the 10-20 year maturity horizon.

It has AUM of $594.15 million and charges a fee of 15 basis points a year. It has an effective duration of 10.38 years and a weighted average maturity of 13.99 years. The fund has returned 3.83% year to date but has lost 3.30% in a year (as of Sep 12, 2017). TLH currently has a Zacks ETF Rank #3 with a High-risk outlook.

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