Despite its poor performance, the iShares 20+ Year Treasury Bond ETF (TLT) has defied industry norms by attracting an impressive $19.8 billion in assets this year. This $41.8 billion ETF has been ranked near the bottom of the performance tables, yet investors continue to flock to it.
The recent speculation that the Federal Reserve may cease hiking interest rates has further fueled the demand for long-dated bonds, likely resulting in even more inflows for TLT. The inverse relationship between bond yields and prices means that if yields fall, TLT will deliver substantial gains as it predominantly holds long-dated bonds. Conversely, if yields rise, investors can expect significant losses - a scenario that has unfolded for much of this year.
Currently trading at $89.08 per share, TLT has experienced a significant decline of nearly 50% from its record high in 2020. Furthermore, the steep rise in Treasury yields has negatively impacted total returns, with the fund experiencing a 9.05% loss this year. In contrast, the S&P 500 (SPX) has delivered approximately 14% returns year-to-date.
Scott Opsal, the director of research and equities for the Leuthold Group, notes the unusual trend of TLT attracting new assets despite its severe underperformance. Typically, investors tend to chase positive returns rather than losses. Opsal describes this phenomenon as "extraordinary behavior."
While all mutual funds and ETFs invested in long-dated bonds have faced significant volatility this year due to fluctuating interest rates, TLT stands out for the magnitude of its asset inflows. Rob Isbitts, an independent investment strategist and ETF researcher, likens the investor behavior and the fund's share price volatility to the frenzy surrounding meme stocks, describing it as bouncing around "like a jack rabbit."
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Despite its cult-like following, concerns have arisen about how TLT, a popular bond exchange-traded fund (ETF), has become a temporary hero for those looking to "invest" in bonds. According to Isbitts, it should be noted that TLT is not a representative of the entire bond market.
However, with the potential for a Federal Reserve pause on the horizon, more investors may be inclined to allocate their assets towards TLT. Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, suggests that this presents an opportunity for investors to reintroduce duration into their portfolios.
Duration refers to the sensitivity of a bond's price to changes in interest rates. Bonds with longer maturities, such as long-term Treasuries, typically have higher durations and therefore greater interest rate risk.
Nicholas Colas, co-founder of DataTrek Research, advises that if interest rates do decline further, investors should focus on the segments of the U.S. bond market with the highest or longest duration.
By investing in long-dated bonds, investors can benefit from price appreciation if yields decrease. Longer-duration bonds are particularly sensitive to interest rate movements, appreciating more rapidly when rates fall and declining more rapidly when rates rise.
DataTrek reports that TLT has a duration of 16.4 years, indicating that a 1% increase in rates can lead to approximately a 16% decline in price. This duration is more than twice that of its counterpart, the iShares 7-10 Year Treasury Bond ETF (IEF).
Irrespective of personal inclinations, being aware of where one's bond portfolio stands on the duration continuum will prove valuable in the coming months, according to Colas.