One of America's most beloved bond funds is currently under scrutiny due to its disappointing performance. However, experts believe that it might be an opportune moment to consider investing in it.
The iShares 20+ Year Treasury Bond ETF (TLT), a massive $37.6 billion fund that tracks an index of long-term Treasuries, is typically regarded as the ultimate safe haven for investors seeking shelter during market turbulence. Unfortunately, its returns have been lackluster as of late.
In fact, the fund's total return stands at a discouraging -14.3% this year, making it one of the worst-performing funds among U.S. bond ETFs with assets exceeding $500 million, as reported by Morningstar Direct.
Experts, such as Jamie Cox, managing partner for Harris Financial Group, highlight the significance of the long bond in relation to the Federal Reserve's interest rate policy. They explain that when short-term interest rates experience rapid increases, it disproportionately impacts longer-dated Treasuries like those tracked by the TLT.
Despite its poor performance, investor interest in the fund remains high. As of September's end, the TLT has attracted over $17 billion in net inflows this year alone, according to Morningstar Direct. Remarkably, it ranks as the third-most-popular U.S. ETF in terms of fund flows for 2023.
Cox views this as a prime buying opportunity. He asserts that discounted fixed-income instruments are rarely available, particularly when it comes to U.S. government bonds. Therefore, he emphasizes the potential value in considering an investment in the TLT during these times.
Flight to Safety Expected in 2024
In a recent statement, an expert predicted that we will witness a significant flight to safety in 2024. This phenomenon will occur as a result of the Federal Reserve's strategy to combat inflation by increasing interest rates, which is expected to have detrimental effects on the economy.
Junk Bonds Outperform Treasuries
While Treasuries face uncertainty, their riskier counterparts, junk bonds, have fared much better. The SPDR Bloomberg High Yield Bond ETF (JNK) has experienced a 2.8% increase this year. Although its annualized total returns over three years show a slight decline of -0.55%, the fund has achieved annualized total returns of 2.4% over a decade, according to Morningstar.
Credit Risk Takes the Spotlight
Todd Rosenbluth, the head of research at VettaFi, a financial research and data company, points out that credit risk is currently offering greater rewards than interest-rate risk. This year, investors who took on interest-rate risk have faced punishing results. Bond yields have risen, causing interest-rate sensitive products to underperform the broader market. Rosenbluth highlights that the iShares 20+ Year Treasury Bond ETF (TLT) has struggled due to climbing bond yields.
20+ Year Treasury Bond ETF Performs as Expected
Steve Laipply, the global co-head of iShares fixed income ETFs for BlackRock, defends the iShares 20+ Year Treasury Bond ETF by stating that it is fulfilling its intended purpose. The ETF accurately delivers returns based on a basket of 20-plus Treasuries and closely tracks its benchmark.