Have Investors Fallen Out of Love With TLT?

The latest rough patch may be a test of ETF investors' relationship.

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Reviewed by: etf.com Staff
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Edited by: Ron Day

Let’s talk TLT, perhaps the most interesting ETF in the world.

Why? It’s had inflows in 18 of the past 20 months, is among the most-searched ETF tickers on the web and rallied at a record pace during the second half of 2023. 

TLT—full name the iShares 20+ Year Treasury Bond ETF (TLT)—became an overnight sensation last year, despite being a 21-year-old fund.

And it had more than $50 billion in assets, before a sharp drop in price earlier this month.

This ETF spent the better part of its first 20 years with an annualized standard deviation on either side of 10%. During the past 12 months, it has been 80% more volatile than that, rivaling that of many parts of the stock market. And despite the bull rush of assets during 2023, it’s still down 8% the past 12 months, down 3% annualized the past five years, and up 1% a year for the past 10 years. 

With all the hype and attention paid to the stock market, it is hard to find a more newsworthy ETF than this one. 

It is…the most interesting ETF in the world. At least to me.

TLT: A Bad Romance?

What is it about the fund that makes it so intriguing, especially at a time when it's vulnerable thanks to this week’s “flash alert” from the CPI report that inflation is not going to simply roll over. With TLT already off about 6% year-to-date (including dividends) and showing early signs of a potential dip toward last year’s price lows, maybe it is time we straighten out what this suddenly huge and popular ETF is and what it isn’t. 

TLT invests in 20-to-30-year US Treasury bonds. It is often mistaken as a “proxy” for the 10-year Treasury. And while there is a strong correlation at times, TLT’s popularity may have been its own worst enemy.

My sense is that some investors, in an era where many are learning about bond investing for the first time, look at TLT as “a bond that can get me huge returns.” Maybe it will if rates plunge back to pre-Fed rate hike cycle lows. But that will take a lot of things going right. But instead of focusing on the middle part of the yield curve, say 5-10 years, fund flow data indicates that many are skipping that “boring” bond stuff and jumping right to TLT. 

Do they know what they are buying? Maybe not. 

What TLT Is and Isn’t 

TLT is a fine way to try to pursue total return from an investment in bonds. But that sentence is filled with deceptive over-simplification. Long-term bonds, even US Treasuries, can act a lot more like stocks than many investors realize. TLT lost nearly half its value during the Fed’s 11 rate hikes, a performance that rivals the worst stock market crashes of this century. 

But it seems folks view TLT as the bond market representative. If one considers bonds to be an equity market hedge or a source of income with low price volatility, that is not the case, at least not the way it used to be.

The dip-buyers in TLT last year saw dramatic, historic gains. Good for them. But with inflation apparently not done just yet, and long bond rates pointing potentially higher, TLT could be revealed for what it is: a levered version of shorter-term bonds, without using actual leverage. And short-term bonds yield more, without the price drama. 

There’s nothing wrong with the TLT experience for investors who know what they own. But in the same way that one doesn’t start their skiing lessons on the steepest mountain, perhaps bond investors should climb the education ladder and maturity ladder more slowly.

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.