PIMCO 25+ Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund (ZROZ) seeks to track the ICE BofA Long US Treasury Principal STRIPS Index, which measures the performance of zero-coupon U.S. Treasury securities with 25+ years to maturity. These bonds pay no periodic interest but are purchased at deep discounts to face value.
How It Works
ZROZ uses a passive, market-value-weighted approach to replicate its benchmark index of Treasury STRIPS (Separate Trading of Registered Interest and Principal Securities). The fund holds zero-coupon bonds created by stripping the principal payments from long-term Treasury bonds, eliminating reinvestment risk. Portfolio rebalancing occurs monthly to maintain target duration and maturity profiles. Holdings typically include 15-25 individual STRIPS with maturities extending beyond 25 years.
Key Features
- Extremely high duration of 25+ years amplifies price sensitivity, gaining 25%+ when rates fall 1%
- Zero reinvestment risk since bonds pay no coupons, providing pure interest rate exposure without income timing issues
- Highest credit quality possible with full faith and credit backing of U.S. Treasury, eliminating default risk entirely
Risks
- This ETF can lose 20-30% rapidly when interest rates rise just 1%, making it extremely volatile for bond investors
- Duration risk compounds over time—small rate changes create massive price swings due to 25+ year average maturity profile
- Deflation periods can reduce the real purchasing power of the fixed principal payment received at bond maturity
Who Should Own This
Best suited for sophisticated investors with high risk tolerance seeking tactical interest rate hedges or speculation on falling rates. Requires 1-3 year maximum holding periods due to extreme volatility. Works as 5-15% satellite position for rate-sensitive strategies, not as core bond allocation for conservative portfolios.