PIMCO 25 Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund(AMEX:ZROZ)

ZROZ's high-duration play makes it hypersensitive to every twitch in interest rates. It tracks an index of long-term Treasurys with coupon cash flows removed, leaving only the principal repayment at the end. Called STRIPs, these securities are sold at deep discount to face value and make no interest payments until they mature at par. Since STRIPs are zero coupon bonds, they are particularly sensitive to interest-rate risk. As a result, the fund's effective duration is much higher, which in turn produces volatile results compared with vanilla long-dated Treasurys. Despite the lack of coupons from the underlying zeroes, the fund itself makes quarterly distributions with proceeds from bonds sold at rebalance.