GOVI vs. Stocks: The Treasury ETF Built for a Rate-Cut Cycle

GOVI vs. Stocks: The Treasury ETF Built for a Rate-Cut Cycle

The Invesco Exchange-Traded Fund Trust II Invesco Equal Weight 0-30 Year Treasury ETF (GOVI) is not the first thing traders think of when they start looking for a play to take advantage of falling interest rates. The fund is nearly 18 years old, debuting just in time for the global financial crisis back in October of 2007. That was days after the stock market began one its worst 18 months in recorded history. As shown here, the S&P 500 fell nearly 50% during that time.

GOVI performance vs. SPX. Source: Ycharts.

I remember it well, since that was also around the time I lead-managed a hedged mutual fund for the first time. That’s sort of like becoming a fireman, and on your first day, there’s a 5-alarm fire down across town. But we all survived that period, and learned a lot from it.

Why Laddered Treasuries Help When Rates Fall

But there’s an important observation about that time, and several other periods during the life of GOVI, a $960 million in assets ETF, that makes me think that this portfolio of “laddered” US Treasury securities might just have another big moment before too long.

You see, back in 2007, the 10-year US Treasury rate was about 4.6%. That’s not far from the 4.5% level it peaked at recently. Rates fell by about 2% on the 10-year then, and with last week’s combined events, it is hard to bet against that happening again.

The Current Macro Setup (Fed, Jobs, and Debt Supply)

In recent days, we’ve heard from a Fed Chairman that implied that to the roundtable of economists that is the Federal Open Market Committee (FOMC), inflation is not dead yet. But unemployment is starting to tick up. That in turn, caused a guy they refer to as POTUS to call “BS” on the BLS, the Bureau of Labor Statistics, who reports those employment figures. Throw in the urgent need for the United States to refinance its massive debt load at lower rates, and you get the picture: turmoil, chaos, and more to the point for traders, an impetus for falling US Treasury rates, one way or another.

GOVI might be one of the best ways to profit from that, if it indeed occurs. Note that I have not used the ETF’s nearly 4% dividend yield as part of my rationale. That’s a secondary consideration. This is about profiting from lower interest rates. And GOVI’s portfolio provides a somewhat unique way to do that within the bond ETF universe.

How GOVI’s Ladder Works (Holdings, Maturities, Duration Tilt)

GOVI does so by simply owning 30 different US Treasury securities in equal sizes. That creates a portfolio that has a roughly 3.3% allocation to bonds maturing each year through 2055. The average maturity is about 16 years, giving GOVI a long-term bond-type of volatility. When rates fall, that’s what works.

GOVI top holdings. Source: Invesco.com.

GOVI vs. Stocks: What History and Recent Returns Show

Bond returns lag those of stocks quite frequently, and that’s been the case with GOVI versus the SPDR S&P 500 Trust (SPY) the past year. And generally speaking GOVI’s returns have been in the dumps for a few years, as rates rose from near-zero levels.

GOVI vs. SPY, 1 year rolling returns. Source: Ycharts.

However, coming off of a perfect storm for GOVI, rates are now at a level that, if they fall across the yield curve, will set up GOVI for some potentially strong returns ahead. In a market that panics into safer vehicles there’s even potential for GOVI to deliver double-digit annual returns the next few years, amid a stock market that delivers very little. So traders would be well-served to look around, beyond stocks.

GOVI vs. Core Bonds (AGG): Risk/Reward Trade-offs

GOVI was a perennial and strong outperformer of the iShares Core US Aggregate Bond ETF (AGG), the more common US bond market benchmark. That was the case until the post-pandemic period saw long-rates rise sharply, crushing GOVI’s returns.

GOVI versus AGG. Source: Ycharrts.

Yet it was spared the worst of it, which is why very long-term bond ETFs carry much more risk than GOVI does. Because GOVI’s risk is balanced somewhat by the shorter end of its yield curve exposure. Note that ⅓ of the portfolio is invested in bonds 10 years to maturity or less.

Technical Setup: Daily and Weekly

A technical chart view is encouraging. The daily chart, shown immediately below, appears to be building a gradual base. Remember, this is the price of the GOVI ETF, so if that continues higher, it is synonymous with falling rates.

GOVI daily technical chart. Source: Barchart.

The weekly looks similar, albeit at an earlier stage, which is what we’d expect from a chart smoothed to show weekly price ranges and patterns.

GOVI weekly technical chart. Source: Barchart.

Traders are conditioned to look at stocks. And when stocks fail, they look at other stocks. Perhaps it’s time to look at bonds too. Not for the income, but for the profit potential.