TLT: An ETF Overview

When looking at the iShares 20+ Year Treasury Bond (TLT) exchange traded fund (ETF), it is important to consider whether or not interest rates are likely to rise or remain low. Here, the relationship between Treasury yield bonds and interest rates is key to understand.

Generally speaking, if you predict interest rates to rise in the future, it is best to avoid long-term bonds (such as the TLT, which is a 20-year Treasury bond) that could lock in a lower interest rate. However, if you believe interest rates will fall, then it makes sense to invest in an ETF like the TLT. 

Even at the turn of a new decade, the economy seems to be going strong. In fact, Freddie Mac reports that "despite the negative impacts of trade and the deteriorating global economy, the domestic U.S. economy continues to grow and the three-year low in mortgage rates has poised housing to reaccelerate." To start, let’s look at TLT’s key metrics.

Key Metrics of TLT ETF

  • Purpose: Tracks the Barclays U.S. 20+ Year Treasury Bond Index.
  • Inception date: July 22, 2002
  • 20-day average volume: 9,920,465
  • Expense ratio: 0.15% (very low)
  • Year-to-date performance: 22.85%
  • 1-year performance: 34.42%
  • 3-year performance: 13.95%

Economy and the Fed

Diving in a little further, gross domestic product (GDP) increased by 2.1% in 2019. Even though interest rates are currently low, these strong growth numbers make it less likely for the Federal Reserve to raise rates.

Freddie Mac reports that despite rumors or fears around an economic slowdown, the U.S. labor market stands firm. Unemployment numbers are also low, hitting some of their lowest since the early 1970s. In fact, given all the cheap money and extreme leverage created across many markets, the Federal Reserve likely knows that raising rates would lead to a debt crisis. The Federal Reserve itself currently has a $6.7 trillion balance sheet.

If you want to invest in bonds, consider high-quality short-term government bonds. That said, in a deflationary environment, massive deleveraging occurs, which increases the value of the dollar. The U.S. dollar is likely to be the best long bet. As prices for goods and services decline, purchasing power increases. Also, by staying in cash (at all-time market highs), if deflation occurs and the market tanks, you will have an opportunity to buy stocks at big discounts.

The above analysis should be seen from a macro perspective. In the short run, anything can happen. It’s impossible to time the market, but it’s relatively easy to predict long-term results based on logic and trends.

The Bottom Line

TLT is a high-quality ETF, thanks to a low expense ratio and liquidity. It should present a decent investment opportunity in the near future due to low-interest rates which drive up the price of bonds, but it’s probably not the best place to be over the next few years. Consider short-term high-quality short-term government bonds, the U.S. dollar, and best of all cash.

Dan Moskowitz does not have any positions in TLT. He is currently long in FAZ, TECS, DRR, and BIS.

Article Sources
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  1. Freddie Mac. "Low Mortgage Rates, Strong Labor Market Fueling Housing Market."

  2. iShares. "iShares 20+ Year Treasury Bond ETF: Fact Sheet as of 03/21/2020."

  3. iShares. "iShares 20+ Year Treasury Bond ETF."

  4. U.S. Bureau of Economic Analysis. "Gross Domestic Product, Fourth Quarter and Year 2019 (Second Estimate)."

  5. U.S. Federal Reserve. "Credit and Liquidity Programs and the Balance Sheet."

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