EDV Long-Term Bond ETF: Buy Timing and Benefits in Rate Cuts

This site is a great place for me (@mifsee(2) has been working on company and stock analysis while learning privately.

This is only a record of my personal analysis and the contents may contain errors or information that differs from the actual situation. Please understand in advance when viewing this site.

Introduction.

As we move into 2024, the rise in inflation has taken a dip, and all eyes are on interest rates going forward.
However, while there is optimism about the Fed's interest rate path, the reality is that inflation is smoldering strongly and the prospect of a rate cut is not readily apparent.

Although the U.S. economy is also showing strong conditions, some indicators are gradually beginning to emerge as weak, making the outlook difficult to predict.

As for the balance of the portfolio, it is important to consider an allocation to bonds that is strong during periods of interest rate cuts and in periods of economic weakness.
Here we discuss the popular bond ETF EDV, the concept of when to buy bond ETFs, key points, and similarBond ETF "TLT"This section delves into the differences between the two and the benefits of investment.

What are the characteristics of an EDV ETF?

EDV (Vanguard Ultra Long-Term U.S. Treasury Bond ETF) is an ETF (Exchange Traded Fund) managed by Vanguard that invests in long-term U.S. government bonds.

Features of this ETF include

• Investment Target: EDV is,It invests in U.S. Treasury bonds with a remaining maturity of 25 years or more (Treasury Bonds) and is formed by portfolios with very long durations.
• duration: This ETF has a very long duration (interest rate sensitivity of bond prices). The longer the duration, the higher the sensitivity to interest rate changes.
  Since EDVs typically have a duration of 20 years or more, significant price appreciation can be expected during periods of falling interest rates.
• diversified investment: Like all of Vanguard's ETFs, EDV is very broadly diversified, which reduces the risk of certain fixed income securities.
• cost: EDV has a relatively low expense ratio and is considered a cost-effective ETF for long-term investors.
• dividend: EDV pays out quarterly distributions, but given the relatively low yield on long-term government bonds, the dividend yield is correspondingly low.
• liquidity: EDV is a major ETF because it is a major ETF,High liquidity and easy to buy and sell.
• risk: EDVs have very high interest rate risk, so if interest rates rise, prices may fall substantially.

EDV is,By investing in long-term U.S. government bonds, this ETF is suitable for investors looking for large price gains when interest rates fall.On the other hand, when interest rates rise, there is a risk of a large price decline, so it is important to carefully monitor market trends when investing.

Why is EDV so sensitive to changes in interest rates?

EDV (Vanguard Very Long-Term U.S. Treasury Bond ETF) is particularly sensitive to changes in interest rates, for the following reasons

 Long duration

Duration,An indicator of how sensitive a bond's price is to changes in interest rates.
Specifically, it indicates how many % changes in bond prices occur when interest rates change by 1%.

EDV invests in very long-term U.S. government bonds (Treasury Bonds), which typically have a duration of 20 years or more.

• Long Duration: The long duration of EDVs means that when interest rates fall by 1%, bond prices may rise by more than 20%. Similarly, when interest rates rise by 1%, bond prices may fall by 20% or more. The longer the duration, the greater the sensitivity of the price to changes in interest rates.

Impact of Coupon Payments

Long-term bonds typically pay coupons (interest payments) at regular intervals.The bonds in which EDV invests are highly sensitive to interest rate fluctuations because of their low coupon payments and very long time to maturity.

• Present Value Impact: When interest rates fluctuate, the present value of future coupon payments and principal repayments will change significantly. For long-term bonds, this effect is more pronounced.

Change in discount rate

The value of a bond is calculated by discounting future cash flows to present value. If the market interest rate used as the discount rate changes, the present value will also change significantly.In particular, long-term bonds are more affected by interest rate fluctuations because of their longer discount periods.

interest rate risk

Long-term government bond ETFs like EDV have high interest rate risk. Interest rate risk refers to the risk that bond prices will fall when interest rates rise; EDV invests in long-term U.S. government bonds, which makes this risk particularly high.

• Impact of market interest rates: As market interest rates rise, new bonds are issued at higher rates, which lowers the value of existing low interest rate bonds.

Thus, EDV is an ETF that is very sensitive to interest rates, making it an ETF of particular interest to investors who keep a close eye on interest rate trends.

What is a simpler way to explain the relationship between long-term credits and interest rates?

When you borrow money from a bank, the bank charges you a little extra money in the form of "interest". This is the "interest rate.

Bonds are similar; they are issued when a government or company borrows money.
Buying bonds means lending money to the government or a company and receiving interest in return.

What is a long-term bond?

Long-term bonds are bonds issued by a government or company to borrow money over a longer period than 10 years. For example, the company lends money to the government over a 30-year period and receives regular interest payments from the government during that time.

Interest Rate Fluctuations and Long-Term Bonds

As interest rates fluctuate, the value of the bond also changes.
For example,Suppose your bond pays 31 TP3T of interest each year.
But if the newly issued bond pays 4% interest, your bond becomes less attractive.

Because the newer bonds earn more interest.

Sensitivity of long-term bonds

Long-term bonds are particularly sensitive to changes in interest rates.
Because,Because they pay fixed interest over a long period of time, when interest rates rise, newer bonds become more attractive and the value of older bonds declines. Conversely, when interest rates fall, older bonds become more valuable.

Thus, long-term bonds are characterized by the fact that their value changes significantly with changes in interest rates.

Who is EDV's management company?

EDV's asset management company is Vanguard (Vanguard Group, Inc.). Vanguard is one of the world's largest asset managers, offering a wide range of investment products to individual and institutional investors.

Vanguard's features include

• Low cost:Vanguard emphasizes low-cost management, and EDV is one of its products. Its low expense ratio makes it attractive to investors.
• Diversified investments:Vanguard seeks to reduce risk by diversifying its investments; EDV also diversifies risk by investing broadly in long-term U.S. government bonds.
• Reliability:Known as a highly reliable investment management company with a long track record, it has established a solid position in the asset management industry.
• Innovation:Vanguard is a pioneer in index funds and is also committed to innovation in investment products, and EDV is one of the ETFs offered as part of that effort.

What is EDV's expense ratio?

EDV's expense ratio is 0.071 TP3T (as of 2024)

This is very low compared to other long-term government bond ETFs, reflecting Vanguard's low-cost investment policy.

Importance of Expense Ratio

• Impact on Investors:The expense ratio is the cost borne by investors when holding an ETF. The lower the expense ratio, the smaller the impact of costs on investment performance.
• Advantages of long-term investment:A low expense ratio also reduces the cost of holding the asset over time and maximizes the compounding effect.
• Vanguard's Strengths:Vanguard emphasizes low-cost management, and EDV's expense ratio of 0.071 TP3T embodies that policy. This is one of the attractive points for investors.

What is EDV's dividend yield?

The dividend yield of EDVs will fluctuate depending on the market interest rate environment and the interest income from the bonds, but as of 2024, it will approximateAround 2.5%The following is a list of the most common problems with the "C" in the "C" column.

Importance of Dividend Yield

• Stable source of income:Dividend yields provide a regular source of income for investors; EDV pays quarterly distributions, which consist primarily of interest income on the bonds.
• Impact of the interest rate environment:Dividend yields fluctuate depending on the market interest rate environment. If interest rates rise, the yields on newly issued bonds will also rise, and the dividend yield on EDVs may fluctuate accordingly.
• Long-term investment perspective:Over the long term, receiving stable dividends may improve overall returns. As a particularly low-risk asset, EDVs that invest in long-term U.S. government bonds are expected to receive stable dividends.

When are EDV distributions (dividends) paid?

The distribution (dividend) of EDV is,quarterlyThe payment will be made to the
Specifically, distributions are paid on a March, June, September, and December schedule.

Distribution Payment Flow

• Declaration Date： On the day when the distribution payment is announced. On this day, the amount of the distribution and the date of payment will be announced.
• Record Date： Investors must hold EDVs by this date in order to receive distributions. Investors who hold the EDV by this date are entitled to receive the distribution.
• Payment DateDistribution date: The date on which distributions are actually paid out. The distribution is paid into the investor's account.

EDV's current share price and long-term chart

EDV began operations on December 6, 2007. The ETF has been in operation for a long period of time and provides investors with stable investment opportunities based on its past performance.

Long-term price movements show the following trends.

• Rate hikes and price declines:.In March 2023, the Fed begins raising interest rates to combat inflation. As a result, EDV prices drop significantly.
• Low interest rates and rising prices during the Corona period:. During the coronavirus epidemic from 2020, the price of EDVs had risen up to about $180 due to the low interest rate policy adopted.

Even with reference to pre-Corona price levels, there is room for price increases.

What are the advantages of investing in EDV?

The advantages of investing in EDV (Vanguard Very Long-Term U.S. Treasury Bond ETF) are as follows

Investment in long-term government bonds

EDV invests in U.S. government bonds with a remaining maturity of 25 years or more, with very long durations, and can expect significant price appreciation when interest rates fall.

Sensitivity to interest rate fluctuations

EDVs have long durations, making them more sensitive to interest rate fluctuations. They may perform better than other bonds or stocks, especially when interest rates are falling.

Stable source of income

EDVs pay quarterly distributions and can expect stable income gains. Long-term government bonds have low credit risk, which also makes their distributions highly stable.

Low-cost operation

The EDV has a very low expense ratio of 0.071 TP3T, which reduces the long-term cost of ownership.

diversified investment

EDV reduces risk by diversifying its investments across a number of long-term government bonds, thereby reducing the risk of reliance on specific bonds.

High liquidity

EDVs are ETFs with high trading volumes and high liquidity, making them easy to buy and sell and allowing for quick trades when needed.

Hedge against inflation

Long-term government bonds are particularly advantageous in an environment of subdued inflation. When inflation is low, yields on long-term government bonds become relatively attractive.

Investing in EDVs offers many advantages. These features make EDVs a promising investment, especially during periods of falling interest rates.

What are the possible disadvantages of investing in EDV?

While there are many advantages to investing in EDVs (Vanguard Very Long-Term U.S. Treasury Bond ETFs), there are also disadvantages to consider. Below are the main disadvantages of investing in EDVs.

• Risk of interest rate hikes: (1)Because EDVs have very long durations, there is a risk of significant price declines during periods of rising interest rates. Losses due to rising interest rates can be especially large in the short term.
• Price volatility: Volatility of price changes Long-term government bonds are sensitive to interest rate fluctuations, which results in relatively high price volatility for EDVs. This volatility makes them unsuitable for investors seeking stable prices.
• Performance in a low-yield environment:. In the current low interest rate environment, yields on long-term government bonds are also lower, and so are the distribution yields on EDVs. As a low-yielding investment product, it may be less attractive when compared to other high-yielding assets.
• Inflation risk: (1) Long-term government bonds tend to be vulnerable to inflation. As inflation increases, the real value of the bonds may decrease and EDV performance may deteriorate.

Why is EDV attracting attention now?

There are several factors that explain why EDV (Vanguard Very Long-Term U.S. Treasury Bond ETF) is currently in the spotlight.

Trends in Interest Rates

Trends in interest rates have a significant impact on the bond market. In the recent economic environment, the following factors have increased the focus on EDVs

• Projected Fall in Interest Rates: Lower inflation and slower economic growth could cause the central bank to cut interest rates. When interest rates fall, prices of long-term bonds are likely to rise, benefiting long-term government bond ETFs like EDV.
• economic uncertainty: When there is uncertainty about the future of the economy, funds are more likely to flow into long-term government bonds as safe assets.

Attractiveness as a safe asset

Long-term government bonds are viewed as low-risk, safe assets, especially during periods of economic instability.

• Market VolatilityEDVs are well suited for such investment needs.

Portfolio Diversification Effect

Long-term government bond ETFs like EDV are used to increase the diversification effect of portfolios, particularly in the following areas

• risk diversificationThe effect is to reduce the overall risk of the portfolio because it exhibits different price trends than equities and other risk assets.
• inverse correlation: Because prices rise when interest rates fall, they have the potential to support portfolio performance even when equity markets are underperforming.

Long-term yield stability

Long-term JGBs offer stable interest income and are expected to provide long-term yields.

• Stability of distributions: EDV pays quarterly distributions, thus providing a stable income gain.
• Low-risk source of income: Low credit risk and stable distribution payments are attractive to investors.

EDVs are a promising investment for investors, especially during periods of falling interest rates and economic uncertainty.

In situations where interest rate trends are easy to predict, can we say that EDV price trends are also easy to read?

When interest rate trends are predictable, e.g., when the central bank's policy policy is clear, EDV price trends also tend to be more predictable.

Particularly,If interest rates are expected to fall, EDV prices are more likely to rise.

Since financial markets are sensitive to interest rate movements, it is common for EDV prices to move based on market readings of future movements in interest rates.

What are the factors behind the article "EDV is not recommended" and the many searches for it?

There are several reasons for the existence of the article "EDVs are not recommended." These reasons are based on the investor's perspective, market environment, and risk tolerance, which are considered to be the main reasons for the content listed under Disadvantages of EDV Investments.

• Risk of interest rate hikes: (1)EDV invests in long-term government bonds and is therefore very sensitive to interest rate fluctuations.
• Inflation risk: (1)Long-term government bonds are a weak asset class against inflation.
• Volatility: (%)EDVs tend to have high price volatility.
• Low Yield Environment:.In the current low interest rate environment, long-term government bonds may become less attractive to investors because their yields are also lower.
• Low distribution yield:Compared to other high-yielding asset classes, EDV's distribution yield is lower and may be less attractive to investors who value income gains.

Can EDV be selected as a Nisa target?

• Although it is possible to trade within the general NISA framework, it is not possible to invest in TLT using a suspense NISA (savings NISA) and thus cannot enjoy the benefits of a suspense NISA.
• Only domestic investment trusts (and some domestic ETFs) that meet certain requirements can be invested in the "nasase-tate NISA," and not EDVs, which are overseas ETFs.

What is the difference between EDV and TLT, which is often compared to EDV?

EDV (Vanguard Very Long-Term U.S. Treasury Bond ETF) andTLT (iShares U.S. Government Bonds 20+ Year ETF)are both ETFs that invest in long-term U.S. government bonds, but there are some differences. A comparison of the features of each is below.

TLTAs a point of comparison between the EDV and the EDV,

• Length of Duration: EDVs are longer and more sensitive to interest rate fluctuations.
• Expense Ratio: EDV is lower.
• Dividend Frequency: TLT pays dividends monthly, EDV quarterly.
• liquidityTLT: TLT is more liquid and easier to trade.

These differences should be taken into account when selecting stocks.

What is the performance difference between EDV and TLT?

Both EDV and TLT are long-term U.S. bond ETFs, and while their price movements relative to interest rates show essentially the same trend, there are differences in performance.

Compared to the most recent period when prices were at their lowest (around October 2023), EDV shows a return of about 61 TP3T higher than TLT.

This is due to the fact that EDVs deal with longer-term bonds and are therefore more sensitive to interest rate fluctuations.
Therefore, when interest rates are falling, the price increase of EDV tends to be larger than that of TLT, but conversely, when interest rates are rising, the price decline is also larger, making EDV a more volatile ETF than TLT.

Graph comparing price performance of EDV and TLT

TLT Bond ETF: Benefits in a Declining Interest Rate Environment

This section delves into the features of TLT, a long-term U.S. bond ETF, the advantages and disadvantages of investing in TLT, and the relationship between bonds and interest rates. Learn about the relationship between interest rate trends and TLT price movements, the impact of the Fed's interest rate policy, and how to deal with currency risk to help those considering investing in TLTs determine the right time to invest in TLTs.

mifsee.com

Besides TLT, what other similar ETFs are often compared to EDV?

In addition to TLT, similar ETFs that are often compared to EDV include the following

ZROZ (PIMCO 25+ Year Zero Coupon U.S. Government Bond Index Exchange Traded Fund)

• summary: ZROZ is an ETF that invests in zero-coupon U.S. government bonds with a maturity of 25 years or more; zero-coupon bonds have no interest payments and all interest is included in the principal.
• Expense Ratio0.15%
• durationThe EDV is very long and, like the EDV, is highly sensitive to interest rate fluctuations.
• feature: Specializes in zero-coupon bonds, which are subject to high price volatility and high risk.

VGLT (Vanguard U.S. Long-Term Government Bond ETF)

• summaryVGLT: An ETF that invests in U.S. government bonds with a maturity of 15 years or longer; invests in bonds with a slightly shorter maturity than EDV, but still focuses on longer-term government bonds.
• Expense Ratio0.04%
• duration: Shorter than EDV, but still with a long duration.
• feature: Provides an option to invest in long-term government bonds while maintaining Vanguard's low-cost investment policy.

SPTL (SPDR Portfolio U.S. Long-Term Government Bond ETF)

• summarySPTL: SPTL is an ETF that invests in long-term U.S. government bonds with a maturity of 15 years or more.
• Expense Ratio0.06%
• durationLong-term duration and sensitive to interest rate fluctuations.
• feature: Attractive operation with low expense ratio.

GLD (SPDR Gold Shares)

• summary: While not a direct long-term government bond ETF, it is sometimes compared as an inversely correlated asset to the interest rate environment. Gold is often seen as an attractive alternative asset, especially in a declining interest rate environment.
• Expense Ratio0.40%
• featureThe use of the funds is for hedging against inflation and insuring against market uncertainty.

These ETFs, like EDVs, are sensitive to interest rate fluctuations and have similar risk/return characteristics.

What is your prediction for interest rate trends in 2024?

The following projections are made for interest rate trends in 2024.

Balance between tightening and easing interest rates

According to the International Monetary Fund (IMF) outlook, the economic environment in 2024 will remain complex, and central banks will need to conduct prudent monetary policies to balance inflation and economic growth. Inflation is expected to gradually subside in many countries, giving them room to lower interest rates accordingly.

Interest Rate Fluctuation Factors

The World Bank reports that interest rate trends are influenced by the following factors

• Inflation Trends: A steady decline in inflation could weaken the pressure to tighten interest rates and lower interest rates.
• Economic Growth Outlook: Global economic growth in 2024 is projected to be 2.41 TP3T, which would be the lowest level in the past 30 years. Slower growth could be a driver for lower interest rates.
• geopolitical risk: Increased geopolitical risks, such as conflicts in the Red Sea region, could be a destabilizing factor for the economy, which could affect interest rates.

Long-term outlook

In the longer term, the tightening phase of monetary policy may continue to ease, with interest rates expected to decline, especially in the second half of 2024. However, interest rate trends remain uncertain due to economic trends and the need to respond to unexpected shocks.

Based on this information, it is important to closely monitor interest rate trends in 2024 and make appropriate investment decisions.

Which brokerage firms can I buy shares of EDV?

We have listed the major brokerage firms that offer shares in EDV. At these brokerages, you can choose to invest as a CFD (Contract for Difference) in addition to direct stock trading as a foreign stock.

I myself mainly use SBI Securities, but some stocks they handle may not be available for purchase. In such cases, I sometimes use CFDs at Saxo Bank Securities or IG Securities.

summary

We looked in detail at the characteristics of the EDV long-term U.S. bond ETF, the advantages and disadvantages of investing in EDV, and the relationship between bonds and interest rates.Bond ETFs, including EDV, are investment issues with characteristics that are inversely correlated with interest rates, which may make them a relatively safe investment during periods when interest rate trends are more predictable.

TLThas similar characteristics, but it is important to invest at a time when the prospect of a rate cut becomes somewhat clearer. In particular,TMF, a highly leveraged bond ETFand other investments are best made at a time when clear interest rate trends are known.

Holding bond ETFs as part of a portfolio is an effective hedge during periods of interest rate cuts or economic downturns. I personally would like to hold a certain number of positions.