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What Lies Ahead For Treasury ETFs?

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A lot has been happening in Washington D.C. lately. There have been developments in the tax reform. The political landscape is changing. Moreover, the U.S. economy has been posting strong economic data.


Tax Reform and Political Scenario


Earlier last week, Republicans signed a report reconciling the House and Senate versions of the tax bill. The House and Senate will have to vote on the final version before it is sent to President Donald Trump.


Recently, the Treasury department introduced a one-page analysis of the 500-page tax reform bill. It suggested that GDP will grow at 2.9% in the next decade and will raise $1.8 trillion in the period. This is above the 2.2% growth expected by the market and suggests that economic growth, owing to the tax cut, will provide an additional $300 billion over and above the tax revenue deficit.


There is increasing pressure on the Republicans to get their tax bill passed at the earliest. In a latest shock to the Republicans, Democrat Doug Jones defeated Republican Roy S. Moore in the Senate election in Alabama, a deep red state, which voted overwhelmingly for Trump in the November 2016 Presidential election.


As a result, the GOP Senate majority slimmed to 51-49 post Moore’s defeat. This might create difficulties for the Trump administration to pass its key legislations. However, a swearing-in date for Jones is yet to be finalized.


Moreover, the Congress will need to pass an extension in order to avoid a potential government shutdown. If there’s no budget deal by the end of this week, Congress will have to pass its second short-term extension this month to avoid a federal government shutdown.  


Economic Scenario


Changes in U.S. non-farm payrolls surpassed expectations. Although 228,000 new positions were created in November compared with 261,000 in the prior month, the number was above Reuters expectations of a fall to 200,000. However, average hourly earnings rose 0.2% in November compared with expectations of a 0.3% rise. Moreover, the annual increase in wages was also weaker than expected as the November reading came in at 2.5% compared with expectations of 2.7%.


Let us now discuss a few ETFs focused on providing exposure to U.S. Treasuries (see all Government Bond ETFs here).


iShares 7-10 Year Treasury Bond ETF (IEF - Free Report)


This fund seeks to provide exposure to intermediate term U.S. Treasury bonds.


With $7.7 billion in AUM, it charges a fee of 15 basis points a year. It has an effective duration of 7.59 years and a weighted average maturity of 8.34 years. The fund has returned 1.2% year to date and 2.4% in a year (as of Dec 15, 2017). IEF has a Zacks ETF Rank #4 (Sell) with a High risk outlook.


iShares U.S. Treasury Bond ETF (GOVT - Free Report)


This fund seeks to provide exposure to U.S. Treasury bonds in a wide-maturity spectrum.


It has AUM of $5.3 billion and charges a fee of 15 basis points a year. It has an effective duration of 6.14 years and a weighted average maturity of 7.65 years. The fund has returned 1.0% year to date and 1.8% in a year (as of Dec 15, 2017). GOVT has a Zacks ETF Rank #4 with a Medium risk outlook.


Vanguard Intermediate-Term Government Bond ETF (VGIT - Free Report)


This fund seeks to provide exposure to U.S. Treasury bonds in the five-10 years maturity spectrum.


It has AUM of $1.6 billion and charges a fee of 7 basis points a year. It has an average duration of 5.2 years and an average effective maturity of 5.6 years. The fund has returned 0.3% year to date and 0.9% in a year (as of Dec 15, 2017). VGIT has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.


iShares 10-20 Year Treasury Bond ETF (TLH - Free Report)


This fund seeks to provide exposure to longer-term U.S. Treasury bonds in the 10-20 year maturity horizon.


It has AUM of $506.8 million and charges a fee of 15 basis points a year. It has an effective duration of 10.54 years and a weighted average maturity of 14.28 years. The fund has returned 3.1% year to date and 4.4% in a year (as of Dec 15, 2017). TLH has a Zacks ETF Rank #4 with a High risk outlook.


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