Assessing long-duration ETFs’ performance in the last 6 months


Oct. 29 2019, Updated 8:39 p.m. ET

Long-duration ETFs

Long-duration ETFs have longer durations, as they’re mainly composed of securities with long-term maturity dates. The iShares Barclays 20+ Year Treasury Bond Fund (TLT), which seeks to replicate the performance of U.S. Treasury securities that have a remaining maturity of at least 20 years, and the Vanguard Total International Bond ETF (BNDX), which is designed to measure the universe of global non-U.S. dollar-denominated government, government agency, corporate, and securitized investment-grade fixed-income investments, are popular among long-duration ETFs.

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Another popular long-duration ETF is the Vanguard Long-Term Corporate Bond ETF (VCLT), whose portfolio includes U.S. dollar–denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies like Verizon Communications Inc. (VZ) and General Electric Co. (GE) with maturities greater than ten years.

The role of duration

Since these ETFs primarily consist of bonds with higher maturities in their portfolio, they’re highly exposed to interest rate risk. Since the security is held for a greater amount of time, it takes longer for these securities to recover their initial investment. Also, if interest rates tend to rise in the meantime, the loss on long-term bonds will be much greater compared to shorter-term bonds, on account of higher duration and higher sensitivity to interest rate changes. The higher the duration, the higher the exposure to interest rate risk, and the higher the volatility of the ETFs’ price to market interest rate changes.


As you can see in the chart above, BNDX, with duration of 6.7, shows less volatility in price movements compared to TLT, which has a duration of 16.69. Notice that over the last six months, TLT has moved up to 175 and -250 basis points, highlighting the cause and effect relationship between duration and volatility, whereby the higher the duration, the higher the interest-rate risk and the higher the volatility.

The next part of this series shows how short-duration and long-duration ETFs compare over the last six months.


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