PIMCO’s US Treasury bond ETF ZROZ fell to an all-time low of $53.73 on Wednesday, according to Protos. The NYSE-listed fund has lost 16% this year, 21% over the past 12 months, 63% over the past five years, and 73% from its March 2020 peak.
Protos said the result is striking because ZROZ holds claims on the principal of US Treasury bonds, the core repayment component of debt issued by the US government. The report added that the US government has not defaulted on any sovereign bond issuance since 1933, aside from a $122 million technical delay in 1979.
ZROZ tracks an index built around the present value of those future principal repayments. Even so, Protos said anyone who bought the ETF at any point since its 2009 inception would have lost money if dividends are excluded. After including the relatively small dividend payments made by the fund, an investor would still have needed to buy before September 2011 to have made any money.
Long-dated zero-coupon Treasury exposure has been repriced
Protos said investors cannot reasonably blame PIMCO or any active manager for the fund’s decline because ZROZ is a passive vehicle. In its telling, the fund is simply reflecting the drop in the value of its holdings. The present value of long-term US Treasury principal repayments has fallen sharply.
ZROZ tracks a US Treasury Principal STRIPS Index focused on bonds with maturities of 25 to 30 years. STRIPS are valued on the present value of the final principal payment from US Treasury bonds maturing in 25 years or more. These securities do not pay interest and usually trade at a discount to conventional bonds.
Although STRIPS carry 0% interest and repay only at maturity, the US government still guarantees them. Protos said that when Treasury rates were much lower years ago, the value investors assigned to those principal repayments was far higher. At one point, ZROZ investors valued that long-term, government-backed principal exposure at more than $202 per share.
That pricing has changed as Treasury yields moved higher. Protos cited a 5.64% annual yield on current 30-year Treasuries and said a fund that offers only principal repayment exposure is far less attractive than holding regular bonds that actually pay interest.
ZROZ is described as a hedging tool, not insured principal protection
Protos said ZROZ is used mainly as a hedging instrument, allowing bond traders to isolate and trade the value of long-term principal repayment relative to other positions. As money has shifted into other investments, including standard US government bonds that pay interest, the ETF has been sold down to a record low.
The fund’s prospectus, according to the report, has long stated: “An investment in the fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.” In other words, there is no external insurance protecting investors from losses in ZROZ.
- The fund passively holds AA-rated assets
- Its management fee is 0.15%
- It paid $3.25 per share in trailing 12-month dividends
At the time referenced by Protos, ZROZ was trading at $53.73, its lowest level on record. The publication said the ETF hit that all-time low during the day’s session.
