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I'm debating whether to include any long term US treasury bond ETF in my portfolio. Are there any reasons I would include it rather than go for other types such as intermediate term bond ETFs and US broad market ETFs? After looking at the comparison of the growth of $10,000 graph, I don't see much reason to have long term bond ETFs.

growth of $10,000

  • Light blue - SCHZ: Schwab US Aggregate Bond ETF
  • Dark blue - SPTL: SPDR Long Term Treasury ETF
  • Orange - SCHB: Schwab US Broad Market ETF

Volatility

The long term bonds have huge bumps. This means higher volatility. This goes against bonds intended purpose of bonds: to provide a steady and safe source of income. Looking at the intermediate term bond fund, you see that the line is much smoother - a good quality of bonds.

Total Return

The return of the long term bond ETF over 5 years is only 5%, while the US broad market ETF has a return of 14%. Obviously, people want the one with higher return.

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    Start your graph 4 years earlier... – Ben Voigt Sep 9 '18 at 19:57
  • You're referring to the 2009 market crash, right? The maximum time I can go back is 10 years on Schwab's website (many other websites have this limit too - possibly as a psychological tactic to get people more confident) – JoJo Sep 9 '18 at 20:09
  • Since those Schwab funds were started relatively recently, to get data back through the last recession, you may want to use BIV, BLV, VTSMX. Despite higher levels of "normal" volatility, the long-term bond fund took similar losses during the recession as intermediate term. Low volatility and limited downside aren't the same thing. – Ben Voigt Sep 9 '18 at 20:09
  • Yahoo! finance charting was able to go over 10 years. – Ben Voigt Sep 9 '18 at 20:10
  • It does indeed show the NAV for greater than 10 years, but as with most bond funds the NAV remains a steady line. For bond funds, the growth comes from the coupon payments. – JoJo Sep 9 '18 at 20:38
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I'm not sure it makes sense to compare the average returns of US equities and long-term treasuries, as they have different risk/return profiles but here are a couple of considerations.

Adding bonds to your portfolio will provide a certain amount of diversification. As pointed out in the comments, if you start your chart in 2007, you see that there was a high, negative correlation between SPTL and SPY in 2008, i.e. they pretty much moved in opposite directions.

One consideration in comparing SPTL to SCHZ is duration. Since long-term bonds have higher duration, they are more sensitive to interest rates. As a result, SPTL should outperform (underperform) SCHZ in a falling (rising) rates environment.

Also, SCHZ contains ~74% AAA-rated bonds with the remainder roughly split between bonds rated A or BBB. Compared to SPTL, SCHZ is going to be more correlated to US equities and will be affected by widening credit spreads.

SPTL vs SPY

Image source: Yahoo Finance

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If you view your retirement as a liability, buying long duration bonds could be viewed as a hedge.

Edit: Let's say you need to pay someone $1 in the future. If interest rates are 1%, you would need to set aside more money today than if interest rates were 10%. The longer the time between now and when payment is due, the larger the difference is.

When you have a payment due far into the future (like a young person's retirement), a small decrease in interest rates can make the amount needed today to increase significantly. When you buy a fixed rate treasury bond, the price goes up when treasury interest rates go down. Think of it as buying that future $1 today, rather than putting the money in a savings account with a rate that goes up and down every day. The savings account balance may be more stable, but you're less sure how much you will have at the end of 30 years.

  • could you elaborate? – 0xFEE1DEAD Sep 9 '18 at 23:53
  • elaborated in an edit – Charles Fox Sep 10 '18 at 1:12

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