VGLT: Fed Rate Cut Could Offer Huge Capital Gain Opportunity

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You can become one too! Share your best investment idea by submitting your article for review to our editors....</p>\n\n<a href=\"https://seekingalpha.com/article/4695975-vglt-fed-rate-cut-could-offer-huge-capital-gain-opportunity\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4581","symbol_name":"高盛持仓","start_time":0,"source_url":"https://seekingalpha.com/article/4695975-vglt-fed-rate-cut-could-offer-huge-capital-gain-opportunity","article_id":"2438276379","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/912015932/image_912015932.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2438276379","pubTimestamp":1716898320,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Editor's note: Seeking Alpha is proud to welcome Ali Rayyan as a new contributing analyst. You can become one too!Vix Index wide range and spread options  Thesis Expander The buy thesis can be summarized as follows: This VGLT ETF provides fixed income as a dividend with a yearly rate of 3.77%; it is distributed on a monthly basis, which gives opportunity for those who reinvest the payment directly as it is paid monthly, not to wait for a quarter or more to do so. The ETF can experience substantial capital growth once the Federal Reserve starts to cut interest rates, and it will likely do that soon. However, if the Federal Reserve decides to keep the rates higher for longer, investors will keep enjoying the 3.77% dividends with a modestly stable price, and eventually, if the Fed decides to increase the interest rate, price volatility for such an ETF will not be in catastrophic condition, but the equity market will be. 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Share your best investment idea by submitting your article for review to our editors. Get published, earn money, and unlock exclusive SA Premium access. Click here to find out more » Klaus Vedfelt Today's financial climate is not completely clear and predictable; there is a lot of volatility and uncertainty surrounding it. Inflation data keeps providing us with divergent paths, which will reflect on monetary policy decisions. However, as I am always saying, when I am not bullish, I am not bearish. A good solution for such uncertainty is exposure to Treasury bonds, which the Vanguard Long-Term Treasury Index ETF (NASDAQ:VGLT) offers. VGLT offers exposure to long-term Treasury bonds that provide an ongoing, reliable stream of income with minimal credit risk. This ETF is going to take advantage of declining interest rates, which offer potential capital appreciation. All of this comes with low expense fees, which even stretch the benefits to their maximum limits. Investors should also be mindful of the sensitivity of long-term U.S. Treasury ETFs to interest rate increments, but this can be mitigated, and being in bond ETFs would be considered much wiser than being in the equity market if the Fed decides to resume interest rate hikes. So, I am initiating an investment call for VGLT. Time To Consider VGLT As (Win-Win-Win) Situation Long-term bond ETFs are exchange-traded-funds that primarily invest in and hold fixed income securities with a long maturity time, usually between 10 and 30 years. These ETFs usually track the underlying assets, such as governmental, corporate, and municipal bonds, and sometimes much more complicated and mixed financial instruments. Taking into consideration that today's market experiences a lot of volatility and mixed financial reports, which leads to a high level of uncertainty for the near future, bond ETFs are highly recommended. But why is that? Vix Index wide range and spread options (Microsoft Start ) Thesis Expander The buy thesis can be summarized as follows: This VGLT ETF provides fixed income as a dividend with a yearly rate of 3.77%; it is distributed on a monthly basis, which gives opportunity for those who reinvest the payment directly as it is paid monthly, not to wait for a quarter or more to do so. The ETF can experience substantial capital growth once the Federal Reserve starts to cut interest rates, and it will likely do that soon. However, if the Federal Reserve decides to keep the rates higher for longer, investors will keep enjoying the 3.77% dividends with a modestly stable price, and eventually, if the Fed decides to increase the interest rate, price volatility for such an ETF will not be in catastrophic condition, but the equity market will be. However, I will introduce a mitigation strategy for such a dark scenario at the end of this article. Last but not least, this ETF for me is a win-win-win situation. The Current Situation (First Win) VGLT ETF and as per Seeking Alpha ETF grades consider very low expense rate with only 0.04% only and dividend rate of grade B with 3.77% on a yearly basis, moderate accepted risk of grade C- and high liquidity of A+ grade; therefore, an ETF of such parameters is considered attractive investment grade for me without moving even to the next part of the thesis. VGLT ETF GRADES (SEEKING ALPHA) Moving to ETF net flow, we can notice a huge positive net flow for the last 3 years, with more than $12B. Giving closer attention to the period from January 2023 to date, we can notice a huge inflow to the ETF, piling assets under management to $16.33B as per today. Giving even deeper attention to price characteristics, we can easily notice that the price is forming a bottom formation waiting for the Fed to start interest rate cuts, which can also be considered another dimension that can be added to our buy thesis. VGLT FUND FLOW (TIP RANKS) Furthermore, tracking the smart money movement, as per the 13F filing of more than 487 hedge funds submitted to the SEC, we perceive a huge pile up on VGLT shares starting from October 2023 to date, which indicates that smart money is finding this ETF as a safe place to be, for now and for a short time to come, and this adds another dimension to our buy thesis. HEDGE FUNDS SHARES FOR VGLT (TIP RANKS) Comparison To Other Peers To completely understand the strength associated with our VGLT ETF, I will compare it to two of its peers: The iShares 20+ Year Treasury Bond ETF (TLT) and Vanguard Long Term Treasury Fund Inv (VUSTX). Peers comparison (Seeking Alpha) It is noticeable that the VGLT has the lowest expense ratio amongst the three with only 0.04%, which makes it the most cost-efficient choice. That means most of the profit will pass through to the investor, especially since this type of ETF, is buy-and-hold for long-term investment, and with such long-term investments, the expense ratio can make a huge difference for future cash flow. For the dividend payment (yield), we can notice that TLT offers a little edge over VGLT and VUSTX, but if we go deeper into both TLT and VGLT divided scores, we can notice that VGLT succeeded in paying its dividend for 14 consecutive years, and increased its dividend for two consecutive years, whereas, TLT failed to do both. So, for me, I am ready to compromise a little bit of dividend yield for such strong dividend fundamentals of VGLT. Dividend comparison (Seeking Alpha) Finally, moving to concentration and risk, VGLT has 84 holdings, which is almost double the TLT holding and slightly below VUSTX. Furthermore, VGLT has only 23.67% of assets in the top 10, which is the lowest amongst the three ETFs. Last but not least, VGLT has the lowest turnover of only 20%, compared to 23% and 136% for TLT and VUSTX, respectively. The above-mentioned comparison indicates that VGLT is less prone to risk and would be a better choice in this case. Concentration and risk (Seeking Alpha) Moving Forward, The Fed Interest Rate, And My Second Win The Federal Reserve has decided to hold interest rates steady for the sixth meeting in a row. The target range for the federal funds rate will remain 5.25% to 5.5%. Economists had anticipated a pause in interest rate hikes due to several factors, including cooling inflation. However, this is keeping the current situation, as described above, valid, but what is next? First of all, the question is not if the Fed decides to start cutting the interest rate, but when? The answer can be a little bit complicated with all of these mixed economic reports, so we are forced to extract a lot of information immediately by analyzing the Dot-Chart for this year and years to come. It is very noticeable that the cuts will start at the end of this year (the last two meetings), keeping in mind that we are now approximately in the middle of 2024, which means a few months before the cuts start. INTREST RATE DOT-PLOT (CME GROUP) Deepening even more and in order to elaborate by crunching some numbers and statistical possibilities, we notice that for November and December 2024, there will be 38% and 18%, respectively, of probability that the Fed will hold the rates to the current level of 525 to 550 basis points. That means by the end of this year, 2024, there will be an 82% chance of one or more rate cuts, which will lead to price appreciation for our ETF and its correlated peers. FED RATES PROBABILITES (CME GROUP) What Will Happen After The First Cut? Bond ETFs such as VGLT, which hold a collection of bonds, reflect changes in interest rates through their net asset value (NAV). That means that when interest rates increase, the prices of the bonds in the ETF decrease, causing the NAV to decrease and the price of the ETF to decline, especially for long-term bond ETFs due to their higher sensitivity to interest rate changes. Conversely, when interest rates fall, bond prices rise, leading to an increase in the NAV of the bond ETF and its price. INTREST RATES VS BOND ETF PRICES (JUSTETF.COM) We can notice that the effect of decreasing interest rates will significantly cause the underlying assets of VGLT to appreciate, since most of them are long-term bonds with a maturity period of up to 30 years. Currently, VGLT has an average duration of approximately 16.1 years. This means that for every 1% increase in interest rates, VGLT could lose about 16.1%. This Conversely, if rates decrease by 1%, it could gain around 16.1%, and this is a huge potential price increment, and I can highly recommend diving, especially with the Fed repeating that this is the terminal interest rate, along with all other economists who keep pointing to a cut rate at the end of 2024. End-of-the-World Scenario: My Third Win For Not Being In The Equity Market! Will The Fed Increase The Interest Rate Again? It is unlikely that the Federal Reserve will resume increasing the interest rate. However, after the inflation rates keep heating up, some economists start to argue that the Federal Reserve may increase the interest rate in the following meeting (June). I do believe that is something extremely unlikely to happen, but just in case, this will reflect badly on the VGLT ETF and all other bond ETFs, especially the ones that hold long-term underlying assets, taking into consideration that the correlation is 100 basis points to 16% in price decrement, will hold, so if the Fed increases the interest rate by 25 bps, this will lead to a 4 to 5% decrease in the ETF price. However, I do believe if the Fed does this, it will lead to a market shock, and the Fed will send the economy into recession, and inflation will cool down quickly. As a result, the Fed will start to cut interest rates rapidly, making the price of the ETF recover in a very short time. Debating this dark scenario, I prefer my money to be in a bond ETF and not anywhere else in the market, so I also consider this ETF a win if the Fed decides to surprise everyone with another hike. TARGET RATES FOR JUNE (CME GROUP) Is There Any Solution To Mitigate This Dark Scenario? The short answer is yes; there are a lot of measures that can be taken to mitigate such a dark scenario. As we examine bond-base ETFs, the ultra-short-yield ETF will be a good choice to mix with long-term bond ETFs. They (the short-term bond ETFs) are less likely to decline if interest rates increase. This is resulting from the fact that their underlying assets are ultra-short, usually no more than 6 months, and they can make a quick adjustment as the bonds in an ultra-short-term bond ETF mature quickly. The ETF can reinvest the proceeds into new bonds at the higher prevailing interest rates. This means the yield of these ETFs adjusts relatively quickly to reflect the new interest rate environment. Nevertheless, the coupon payments or interest income from newly purchased bonds will be higher, leading to an increase in the ETF's yield, and this can mitigate the decline in the underlying assets of long-term bond ETFs. To demonstrate that, I ran a Monte Carlo simulation for a portfolio consisting only of long-term Treasury ETFs, and the result was that the portfolio experienced a huge maximum drawdown that hit a low of -55%. Monte Carlo Simulation (portfoliovisualizer.com)100% LONG TERM BOND ETF (portfoliovisualizer.com) But by rerunning the same simulation using 40% short-bond ETFs and 60% long-bond ETFs, the maximum drawdown was mitigated to almost -36%,as per the attached histogram. 40% SHORT-TERM BOND ETF AND 60% LONG-TERM BOND ETF (portfoliovisualizer.com) Investment Risk Investing in long-term Treasury bonds and their associated ETFs, like VGLT, can involve some noticeable risks and drawbacks. Starting with their sensitivity toward the interest rate, the interest rate is inversely correlated with long-term Treasury bonds. As the interest rate rises, the price of underlying assets can experience substantial capital losses. VGLT has an almost 16.1-year of maturity; therefore, the capital losses can reach 4-5% for each 25 bps, as mentioned before, this is considered a substantial loss for such an asset, which is supposed to be considered safe and less volatile. Inflation can also be well thought out as a potential risk, it can directly erode the safe low yield from bonds since the inflation rate is almost at 3.4% and VGLT yield rate is 3.77%, or indirectly by higher inflation can lead to the Fed reserve considering more hikes in interest rates, which will cause substantial capital losses as mentioned above. Monthly and annual inflation rates in U.S. (usinflationcalculator.com) Finally, the opportunity cost of such a long-term investment can deprive the investor of a much higher investment yield in other asset types, like the equity market. For instance, since May 2023, the SP500 total investment return was just above 30%, while the VGLT total return was almost -5%, for the same period, so investors should be completely aware of the opportunity they are losing here. Summary  Vanguard Long-Term Treasury Index Fund ETF offers a convincing investment opportunity amidst current market volatility and mixed financial reports. It has a low expense ratio of 0.04% and an acceptable annual dividend yield of 3.77%. It can be noticed that there is a huge positive net flow to the ETF, which indicates that it is a safe place to park the money. On the other hand, the smart money represented by hedge funds keeps buying a lot of shares in this ETF, which indicates even more trust. If the Fed starts cutting interest rates by the end of this year, this can be a huge capital gain opportunity for this ETF. If the Fed decides to keep interest rates higher for longer or even increase interest rates, there are special measures to be taken to mitigate such an unlikely risk. So I find myself in a win-win-win scenario, and as a result, I will recommend buying VGLT ETF or any of its peers.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2438276379"}