ETFs That Thrive When Bond Rates Go Nowhere

ETFs That Thrive When Bond Rates Go Nowhere

Potential stability if 10-year yield keeps going up…and down.

Reviewed by: Staff
Edited by: Ron Day

Travel glitches and investing at times mirror each other. Take the case in which my family and I—we just returned from a week out of the U.S.—found ourselves in a country where we didn't speak the local language. 

Our mobile phone service worked, so we assumed we'd get around by pulling up maps. Alas, it was not to be! A global roaming and connection crisis coincided with our trip, resulting in a game of “who can get lost the most times today."

This is the same type of trip bond investors have been going through for months now. Levels on the 10-year US Treasury, and much of the interest rate curve beyond the very shortest-term maturities, have been hinting at strong moves in both directions.  

Whether it is a sharp one-day change or one that runs for a week or so, bond bulls and bears have had their bragging moments. Yet like a sporting event where the score and lead keep changing, the confidence and dollar gains don't last.   

This is a symptom of the times we live and invest in. After 11 Federal Reserve interest rate hikes in under two years, many market participants are anxiously awaiting a reversal lower in rates. That would return the cost of borrowing to more comfortable levels for corporations, individuals, and the government alike.

Inflation May Keep Rising

Yet the other side of the equation is inflation, which may have plateaued. While signs are there that this may be the case for this cycle, history suggests that may be unlikely. So every time economic reports show a whiff of inflation or even stronger economic activity that might prevent inflation from dropping back toward the historically low levels of the past decade, bond rates rise and funds like the iShares 20+ Year Treasury ETF (TLT) fall in value.

That extends a few years of bond market misery that began in early 2022, causing bonds to suffer along with stocks for the first time in the memory of many investors. That’s because it has not happened to that degree since the 1970s, except for a brief episode in 1994, 30 years ago. 

One outlet for bond investors who would like to finally see that the market makes up its mind is to get paid while they wait. A trio of ETFs from industry leader iShares represent one way to persevere through the stagnation.  

The $900 million iShares 20+ Year Treasury Bond Buy Write Strategy ETF (TLTW) owns the wildly popular TLT but goes an important step further. It sells covered calls against that position, rolling the options contracts monthly. TLTW’s massive xx% yield from the combination of the call option premiums and TLT’s dividend yield acts as a strong cushion if rates rise and bond prices tank.  

Covered Call ETFs Offer Upside Potential 

If rates drop, TLTW’s option income matches the price gains of TLT up to a point. For investors looking to simply avoid having to pick their spots during this unsettled time in the bond markets, TLTW might be worthy of some research effort.

For those willing to take on some credit risk, and like the TLTW structure and reward to risk tradeoff, two other ETFs from iShares apply the covered call strategy to corporate bonds via the $50 million iShares Investment Grade Corporate Bond Buy Write Strategy ETF (LQDW) and lower quality bonds via the $180 million iShares High Yield Bond Buy Write Strategy ETF (HYGW). In each case, calls are written against the ETF whose ticker symbol is the same as the covered call product, minus the W at the end.  

Interest rates have been on a journey to nowhere. That’s because there are some key uncertainties that still linger halfway through 2024. But with these and many other ETFs, each investor can decide for themselves what direction they wish to move in, even if the bond market can’t make up its mind about that same question. 

Rob Isbitts' Wall Street career spans 5 decades and multiple roles, all dedicated to providing clarity to investors by busting classic myths and providing uncommon perspective. He did so as a fiduciary investment advisor, Chief Investment Officer and fund manager for 27 years before selling his practice in 2020. His efforts now focus exclusively on investment research, education and multimedia. He started ETFYourself and SungardenInvestment to provide straightforward commentary and access to his investment intellectual property for portfolio construction, stocks and ETFs. Originally from New Jersey, Rob and his wife Dana have 3 adult children and have lived in Weston, Florida for more than 25 years.