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ETF Spotlight on PIMCO 25+ Year Zero Coupon Treasury (NYSEARCA:ZROZ), part of a weekly series.

Assets: $19.8 million

Objective: Tracks the Bank of America Merrill Lynch Long U.S. Treasury Principal STRIPS Index

Holdings: 100% of this fund is invested in Government bonds dated 20 years or more

What You Should Know

  • Dividend payments and rebalancing occur quarterly
  • Zero coupon bonds have different maturities, anywhere from one year to 40 years
  • STRIPS – Separate Trading of Registered Interest and Principal of Securities – are U.S. Treasuries that have been separated so that the principal and interest are two separate securities
  • More points about zero coupon bonds, courtesy of ETF Guide, are that: they’re issued at deep discounts and redeemed at face value; taxes are due annually on interest payments; they tend to be more volatile than conventional bonds; and they’re more sensitive to interest rate changes
  • One of the biggest risks of zero coupon bonds is that the coupon at maturity could be less than inflation, and longer-dated bonds will take a bigger hit
  • The biggest pro for zero coupon bonds is the discount to par that they offer
  • The yield to maturity on ZROZ is 4.43%

Disclosure: None

Source: ETF Spotlight: PIMCO 25+ Year Zero Coupon Treasury