ZROZ, a PIMCO ETF allocated to US Treasury bond repayments guaranteed by the US government, has lost 16% of its share price this year. It also lost 21% over the past 12 months, 63% over the past five years, and is down 73% from its March 2020 peak.
The terrible results for investors are particularly curious given the seniority of its claims.
Specifically, its NYSE-listed ZROZ owns claims on the principal of US Treasury bonds, the largest and most important piece of a US government bond.
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To be clear, the US government hasn’t defaulted on any sovereign bond issuance since 1933, aside from a $122 million technicality delay in 1979.
The largest government in the world guarantees principal repayment of US Treasuries, and ZROZ tracks an index of the present value of those repayments.
Still, all buyers of the ETF at any time since its inception in 2009 have lost money, excluding dividends. Even after adjusting for the small quantity of dividends that the ETF has paid, an investor would have had to have bought prior to September 2011 to have made any money.
At time of writing, shares are currently trading at an all-time low of $53.73.
Worse, investors cannot even blame PIMCO — or any active manager — for the ETF’s decline. Instead, it’s simply an accurate representation of the decline in the fund’s holdings.
The present value of long-term US Treasury principal repayments has collapsed.
Generational sell-off in zero-coupon bonds
ZROZ passively tracks an index, specifically a US Treasury Principal STRIPS Index tracking bonds with 25-30 year maturities.
Investors value STRIPS based on the present value of the final principal payment of US Treasury bonds maturing in 25 or more years.
STRIPS are US Treasury bonds that don’t pay interest, typically trading at a discount to regular bonds. Even though they pay 0% in interest and only repay at maturity, the US government guarantees STRIPS.
Many years ago, when US Treasury interest rates were much lower, the value of those principal repayments — even stripped of their relatively small interest payments — was much higher.
The security and safety of a US government-guaranteed repayment of long-term principal was worth, according to ZROZ investors, over $202 per share.
Today, US Treasury bonds pay much higher interest. As a result, an ETF that simply provides exposure to principal repayment is far less attractive than holding modern-day bonds paying 5.64% annually, in the case of current 30-year Treasuries.
ZROZ collapses to all-time low today
As a result, investors have sold-off ZROZ to an all-time low of $53.73 today in favor of simply owning other investments, including regular US government bonds that actually pay interest, unlike STRIPS.
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ZROZ is primarily a hedging instrument, allowing bond traders to separately trade the isolted value of long-term principal repayment relative to other trades.
The ETF’s prospectus has always stated clearly, “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.”
No one will insure ZROZ investors against the losses on their investment.
It also passively holds AA rated assets, charges a 0.15% management fee, and has paid a mere $3.25 per share in trailing 12-month dividends.