GOVI ETF: A Laddered Portfolio That Works

It’s been a while since there was a compelling reason to consider bond ladders or products that use them, but now is an interesting time to look into them. A bond ladder is an investment strategy that involves purchasing multiple bonds with different maturity dates spread out over a period of time. This strategy is akin to creating a ladder where each rung represents a bond that matures in a different year. The idea is to mitigate risks associated with interest rate fluctuations and reinvestment risks. As each bond matures, the principal is returned to the investor, who can then decide to reinvest the money into another bond at the current market rate, spend it, or invest it elsewhere. This staggered approach allows for a steady stream of income through interest payments from the bonds, which typically occurs semi-annually or annually.

Using a bond ladder has several benefits. Firstly, it provides income diversification. Since bonds in the ladder will likely have different interest rates, this can help spread out the risk. Secondly, it offers a measure of protection against interest rate volatility. When interest rates rise, the prices of existing bonds tend to fall, but the investor has the opportunity to reinvest the proceeds from maturing bonds at higher rates. Conversely, if rates fall, the investor still benefits from the higher-yielding bonds in their ladder. Lastly, bond ladders can help with liquidity and financial planning. By strategically setting the maturity dates, investors can align the bond maturities with their anticipated cash flow needs, ensuring that funds are available when needed without having to sell bonds prematurely, which could result in capital loss.

You can either do a bond ladder yourself, or get access to one through an exchange traded fund like the equal weight Invesco Equal Weight 0-30 Year Treasury ETF (NASDAQ:GOVI). The fund’s primary objective is to match the performance of the ICE 1-30 Year Laddered Maturity US Treasury Index, pre-expenses and fees. This underlying index is designed to measure the performance of a maximum of 30 U.S. Treasury Notes or Bonds that represent the annual February maturity ladder across the yield curve.

ETF Holdings: The Top 5 Positions

When we look at the maturity profiles of the Treasuries in GOVI, we can see it’s well spread out. The effective duration is 10.15 years, which does make it sensitive to interest rates but far less so that long duration Treasury ETFs like TLT.

Sector Composition & Weightings

GOVI, being a single-sector fund, invests exclusively in U.S. Treasury securities, making the entire portfolio’s allocation 100% dedicated to Treasuries. This sector-specific concentration allows investors to gain targeted exposure to U.S. government debt instruments.

Peer Comparison: GOVI vs. Other Treasury ETFs

When compared to similar ETFs in the Government Bond ETFs category, certain distinctions become apparent. For instance, the iShares 10-20 Year Treasury Bond ETF (TLH) and the iShares 20+ Year Treasury Bond ETF (TLT) are comparable funds. TLH tracks the ICE U.S. Treasury 10-20 Year Bond Index, while TLT tracks the ICE U.S. Treasury 20+ Year Bond Index.

Despite the similarities in their investment objectives, these funds differ in terms of their expense ratios and portfolio compositions. TLH and TLT both have expense ratios of 0.15%, while GOVI is at 0.23%. Yet, the duration and maturity of the bonds they hold vary, leading to differing risk and return profiles. GOVI has performed better than both by being down less in the past several years because of the laddering approach

The Pros and Cons of Investing in GOVI

Like any investment, GOVI comes with its share of advantages and drawbacks.

Pros:

1. Diversification: As GOVI invests in a broad range of U.S. Treasury bonds with varying maturities, it provides a level of diversification that can help mitigate risk.

2. Low Expense Ratio: GOVI’s fees are in line with many other government bond ETFs, making it a cost-effective option.

3. High Credit Quality: Since the fund invests exclusively in U.S. government securities, it is considered to have a high credit quality. U.S. Treasury bonds are backed by the full faith and credit of the U.S. government, making them one of the safest investments available.

Cons:

1. Interest Rate Risk: As with all bond funds, GOVI is subject to interest rate risk. If interest rates rise, the price of existing bonds falls, which could negatively impact the fund’s performance.

2. Limited Growth Potential: Given the safe nature of U.S. Treasury bonds, the fund may offer limited growth potential compared to other types of investments.

3. Inflation Risk: Over time, inflation can erode the purchasing power of bond interest payments. If inflation rises, the real return on U.S. Treasury bonds could be less than expected.

Conclusion: To Invest or Not to Invest

Investing in the Invesco Equal Weight 0-30 Year Treasury ETF isn’t a bad thing here if worried about credit risk. While the fund does present different risks, such as interest rate and inflation risks, its advantages of diversification, low costs, and high credit quality make it an appealing option for investors seeking a safe and steady income stream.