One of America’s most popular bond funds is in the doghouse for poor performance. It may be time to start buying.
The $37.6 billion
iShares 20+ Year Treasury Bond
ETF (ticker: TLT), which tracks an index of Treasuries with maturities of 20 years and more, is supposed to be the ultimate haven fund—the place to hide when equities and other riskier assets tank. Returns have been dismal.
The fund’s total return this year is minus 14.3% making it one of the worst-performing funds in 2023 among U.S. bond ETFs with more than $500 million in assets, according to Morningstar Direct.
“The long bond is sort of ground zero for the Federal Reserve’s interest rate policy,” said Jamie Cox, managing partner for Harris Financial Group. “When short-term interest rates rise quickly, you get a disproportionate impact to the longer-dated Treasuries.”
Poor performance hasn’t stopped investors pouring money into the fund, which had attracted more than $17 billion in net inflows for the year through the end of September, according to Morningstar Direct. The ETF is the third-most-popular U.S. ETF in terms of flows this year.
“This is the time to be buying,” said Cox. “You don’t get many opportunities to pick up fixed-income instruments at discounts of this level. Very infrequently. And especially in U.S. government bonds.”
In 2024, he said, “you will see the flight to safety materialize” as the Federal Reserve’s effort to fight inflation by raising interest rates wreaks more damage on the economy.
Treasuries’ riskier cousins, junk bonds, have performed much better. The
SPDR Bloomberg High Yield Bond ETF
(JNK) is up 2.8% this year. Annualized total returns over three years are minus 0.55%. But over 10 years, the fund delivered total annualized total returns of 2.4%, according to Morningstar.
“Credit risk is being rewarded more than interest-rate risk,” said Todd Rosenbluth, head of research at VettaFi, a financial research and data company.
“This year, taking on interest-rate risk has been punishing for investors because bond yields have climbed higher, and as bond yields climb higher, the more interest-rate sensitive products fall more than the broader market and the less interest-rate sensitive ones,” said Rosenbluth. “As bond yields have climbed higher this year, TLT is struggling.”
But Steve Laipply, global co-head of iShares fixed income ETFs for
BlackRock,
says the iShares 20+ Year Treasury Bond ETF “is performing exactly as it should, which is delivering the return of that basket of 20-plus Treasuries. It tracks tightly to its benchmark so it’s doing what it’s supposed to do.”
Write to Lauren Foster at [email protected]
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