BLV: Time To Upgrade Vanguard's Long Duration Fund

seekingalpha08-20

VectorianIt has been over two years since we last discussed the Vanguard Long-Term Bond Index ETF (NYSEARCA:BLV). In fact, the last time we spoke about this particular fund was January 2022. Given the...

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Given the...</p>\n\n<a href=\"https://seekingalpha.com/article/4715808-blv-etf-time-to-upgrade-vanguards-long-duration-fund\">Source Link</a>\n\n</div>\n","source":"seekingalpha_fund","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>BLV: Time To Upgrade Vanguard's Long Duration Fund</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nBLV: Time To Upgrade Vanguard's Long Duration Fund\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-20 18:04 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4715808-blv-etf-time-to-upgrade-vanguards-long-duration-fund><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>VectorianIt has been over two years since we last discussed the Vanguard Long-Term Bond Index ETF (NYSEARCA:BLV). In fact, the last time we spoke about this particular fund was January 2022. Given the...</p>\n\n<a href=\"https://seekingalpha.com/article/4715808-blv-etf-time-to-upgrade-vanguards-long-duration-fund\">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":"BLV","symbol_name":"Vanguard Long-Term Bond ETF","start_time":0,"source_url":"https://seekingalpha.com/article/4715808-blv-etf-time-to-upgrade-vanguards-long-duration-fund","article_id":"2460287071","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1458674861/image_1458674861.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2460287071","pubTimestamp":1724148298,"columns":[],"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"VectorianIt has been over two years since we last discussed the Vanguard Long-Term Bond Index ETF (NYSEARCA:BLV). In fact, the last time we spoke about this particular fund was January 2022. Given the","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["rate"],"viewcount":null,"language":"en","relate_stocks":{"BLV":"Vanguard Long-Term Bond ETF"},"translate_title":"BLV：是时候升级先锋集团的长期基金了","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BLV":1},"content_text":"VectorianIt has been over two years since we last discussed the Vanguard Long-Term Bond Index ETF (NYSEARCA:BLV). In fact, the last time we spoke about this particular fund was January 2022. Given the extraordinary macroeconomic changes since then, it is high time to revisit one of the largest long duration bond funds. As of our previous coverage, the pandemic had recently died down and the Federal Reserve had unleashed the rate cut cycle, reducing the federal funds rate to zero in a bold effort to revitalize a broken economy. As is often the case, an unprecedented situation precipitated unprecedented action from the federal government. After rates had hit rock bottom, we presented a thesis that bonds had little room to run. The lynchpin of the thesis was that interest rates needed to rise for bonds to become attractive. However, should that be the case, BLV’s net asset value would be negatively impacted. Today, we revisit BLV and explain the critical differences between two years ago and today. Fund Overview BLV is an exchange-traded fund managed by Vanguard. BLV invests in long-term bonds following the Bloomberg U.S. Long Gov/Credit Float Adjusted Index. The index includes government bonds and corporate bonds rated BBB- or higher by S&P. Our initial coverage of BLV provided a more comprehensive overview of BLV’s portfolio and long-term performance history. Today, we will discuss recent changes and the fund’s improving outlook. BLV lands at the longest end of the duration curve at 13.7 years, meaning BLV is sensitive to movements in interest rates. BLV is one of the longest duration exchange-traded funds, similar to the iShares 20+ Year Treasury Bond ETF (TLT) which focuses exclusively on long duration treasuries. The fund is large, holding more than 3,000 individual bonds with an average yield to maturity, or YTM, of 5.0% and weighted average maturity of 22.5 years. The average coupon is 3.9%. The discrepancy between average YTM and average coupon is indicative of the impact of rising interest rates on long-term bonds. Most holdings in the portfolio continue to trade at a material discount to par value despite being highly rated.   VanguardNearly half of assets are invested in treasury bonds from the U.S. Government. The rest of the portfolio is invested in corporate bonds rated BBB- or higher. The remainder of the portfolio’s credit quality descends from AAA (1.4%) to AA (5.6%) to A (21.3%) to BBB (22.3%). There are far more companies rated A & BBB than AAA & AA, which explains the index’s higher concentration towards the lower end of the investment grade spectrum.   VanguardBLV is also one of the cheapest exchange-traded funds. Vanguard funds are notoriously cheap, consistently besting competing asset managers. BLV charges just four basis points compared to an industry average of 83 basis points, according to Vanguard. Performance Update We last covered BLV in January 2022. We assigned a “Hold” rating, outlining key risk factors for BLV focusing on interest rate risk. Specifically, we presented the idea that an increasing federal funds rate could result in a material decline in share prices based on the fund’s duration. In our initial coverage, we provided a historical analysis of previous rate hike cycles, surveying the damage to BLV’s net asset value. We said: The problem for BLV is that interest rates are at rock bottom and are forecasted to rise sooner rather than later. Having predictable risk associated with interest rates for BLV, shareholders should be sensitive to these bumps in rates. As an important point of reference, let’s see how BLV fared during a prior period of rising rates. Between 2017 and 2018, the federal funds rate increased from the near zero rates of the Great Financial Crisis era. The target rate range increased from 0.00%-0.25% to 2.25%-2.50% during that period, the most substantial interest rate build-up since before the Great Financial Crisis. Data by YChartsAs displayed above, the performance during both rate hike cycles deteriorated faster and more significantly than Vanguard’s short and intermediate term funds. BLV is a long duration fund, which means it invests in bonds which are more sensitive to changes in interest rates. When rates go up, the value of these bonds decline more significantly than short or intermediate bonds. Data by YChartsSince our last coverage, the price of BLV shares has declined by nearly 30%, marking one of the largest drawdowns in the fund’s history. When rates were low, shares of BLV were trading above $100 and today, the price has been cut below $75. Interest rates are the culprit behind this significant change. If we consider the distributions paid over this time frame, performance improves slightly, but remains negative over a period of more than three years. If dividends were reinvested, total return for BLV is still -20%. BLV and similar funds will be used as a case study to show the dramatic effects of rising interest rates on bonds and bond funds. Additionally, falling share price has increased BLV’s yield to the highest in around a decade. Data by YChartsThe picture painted above is positively dreary. Based on drawdowns from peak share prices, it would take nearly ten years for the fund’s dividend to make up for the recent NAV erosion. Not only has the picture changed, but it looks almost upside down from the past two years. What Has Changed? Simply put, the performance of bonds is a more predictable game than stocks or real estate. There are fewer variables going into the valuation and performance of government bonds than other more complex investments. This means stability and it’s the reason that bonds have remained a foundation of portfolios for decades. Bond valuation is a dynamic variety of contributing factors including the economic outlook, federal funds rate, forecasts of changes in borrowing costs, and time to maturity. Bond prices generally follow the movements of the federal funds rate and ten year treasury yield, assuming the issuer is maintaining their creditworthiness. The gap between the bond’s yield and the government baseline is the “spread”. Data by YChartsSince 2022, the Federal Reserve has increased the federal funds rate at an unprecedented rate, causing the ten-year treasury’s yield to increase similarly. Rising yields reached across the economy causing profound changes to fixed income, real estate, and a variety of other assets as markets began rapidly adjusting to a new future. Over the past several decades, bond yields have charted a precipitous decline. As the ten-year treasury fell over generations, corporate bond yields followed. Coupon rates fell until they finally bottomed out following the pandemic. Refer to our comment that BLV’s average coupon is just 3.9%, despite holding bonds with 20+ year maturities. According to data from St. Louis FRED, the spot rate of 20-year corporate bonds fell more or less uninterrupted since their peak in the 1980’s. Over four decades, long-term corporate bond yields fell, until they broke below 2% in 2021. The extraordinarily low yield meant there was nowhere to move but up. The past two years erased around 20 years of falling yields, explaining the significant impact to BLV’s net asset value.   FREDThe question becomes where interest rates are likely to go from here. Without a crystal ball, following the Federal Reserve is likely our best bet. At this point in time, the likelihood of near term rate cuts appears to be high. The Federal Reserve has changed their tune, deviating from their hardline approach to interest rates. According to the market, rate cuts are a near certainty by the end of the year. Markets have begun forecasting cuts at the September meeting as commentary begins to shape around the possibility of lower borrowing costs. Mary Daly, President of the San Francisco Federal Reserve, recently backed a gradual rate cut cycle over the next several years. Other sources corroborate the likelihood of a multiyear rate cut cycle. CME FedWatch is a tool we frequently cite that provides forecasts on changes to the federal funds rate. The tool forecasts a near term rate cut and corroborates the possibility of a long-term rate cut cycle. Twelve months from now, the tool estimates the federal funds rate range is most likely to be 3.25% - 3.50%.   CME FedWatchRate cuts would precipitate the opposite impact as rising interest rates. As interest rates fall, the value of existing bonds increases. For long maturity bonds, like those held by BLV, the impact is more significant and the value of BLV’s portfolio could increase. If there was ever a time to go long, it could be now. Conclusion We first covered BLV when interest rates had reached their long-term valley. After four decades of nearly uninterrupted decline, interest rates have reversed. Share prices have declined by nearly one third since our initial coverage as our pessimistic interest rate outlook played out. Data by YChartsToday, the federal funds rate remains the highest in decades as the Federal Reserve continues fighting an unwieldy economy. Put in the simplest terms, the worst is in the rearview mirror for BLV. Today, the fund has an entirely different outlook, earning BLV an upgrade to a “Buy” rating. The fund’s indexed approach and low expense ratio means it can be a core holding in a fixed income portfolio. For those willing to play the duration curve as the Federal Reserve begins to shift, BLV is a one of the longest duration funds in Vanguard’s lineup. The fund’s duration means falling interest rates could translate to double-digit price appreciation for BLV.  Those who are searching for a core bond fund may choose another option from Vanguard’s lineup, such as the Vanguard Total Bond Market Index Fund ETF (BND), which covers all maturities and has a lower duration. However, you choose to move forward, bonds have the brightest outlook in decades.","kind":"highlight","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":1},"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":"4.29.3","shortVersion":"4.29.3","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/2460287071"}