The iShares Barclays 20+ Year Treasury Bond ETF (TLT) was established in 2002, and it quickly became the premier exchange-traded fund (ETF) for investors to gain exposure to treasuries. Since inception, it has gained 32%. Over this same time, it paid out between 2.5 and 5.8% in annual dividends adding to returns for investors. The ETF is composed of a mix of Treasurys of various durations, primarily 10-year and 30-year notes.

Stocks and bonds tend to trade inversely. When traders and investors are feeling cautious about economic prospects, they tend to buy Treasurys in anticipation of lower interest rates. For example, during the Great Recession from October 2007 to March 2009, TLT increased 25% while paying out nearly 10% in dividends. In contrast, the S&P 500 declined more than 50% over the same time period.

Characteristics

TLT has become a very liquid vehicle for traders to gain exposure to fixed income in the form of long-term Treasurys. Additionally, TLT pays out dividends that are commensurate with yields on Treasurys. Buying TLT is more convenient for traders than buying Treasurys, as it can be done over the market with very low fees.

TLT is managed by iShares and advised by Barclays Group. The ETF endeavors to track the performance of an index of Treasury notes with a duration longer than 20 years. Therefore, there is a mix of long-term bonds of various durations. As capital flows into the ETF, new bonds are purchased. Redemptions are made by selling treasury holdings.

One reason this ETF has become so popular is due to its low expense ratio of 0.15%. With yield-generating ETFs, expenses can have a major impact on the attractiveness of the ETF. As of July 2015, TLT had a 2.8% annual dividend yield. The primary reason behind the low fees of the ETF is its muted turnover. TLT is listed on the New York Stock Exchange and can be traded on various brokerages where commissions differ.

Suitability and Recommendations

The major risk of TLT is interest rate risk. In rising-rate and inflationary environments, bonds tend to sell off in favor of riskier assets. Therefore, TLT is most suitable for investors who are risk-averse, income-focused and pessimistic on the economy. TLT follows the business cycle but in an inverse manner to stocks.

It peaks at the nadir of the business cycle when interest rates are low and investors are eager to lock in returns. In recessions, investors are more than happy to take guaranteed returns to avoid market risk. However, as the economy begins to improve, leading to upward pressure on interest rates, money begins to flow out of bonds and into riskier assets such as stocks and commodities.

Interest rates on Treasurys must rise in a strong economy to compete for capital. Eventually, at some point, Treasurys become attractive due to their high interest rates and as the economy begins to slow. In fact, most recessions begin when interest rates on Treasurys are generous enough to begin taking away money from stocks.

TLT is most appropriate for those who are negative about the economy. A poor economy leads to aggressive monetary policy in the form of interest rate cuts or quantitative easing. This is bullish for bonds. The five-year period of quantitative easing between 2009 and 2014 led to a more than 50% gain for TLT, not including dividend payouts.

TLT is ideal for those looking to reduce risk in their portfolio. It tends to trade inversely with stocks in normal interest-rate environments. When stocks correct, TLT increases. Thus, an investor looking to protect gains or insure against a correction may choose to move assets into TLT.

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