The 2 Most Popular Bond ETFs Couldn’t Be More Different

The two most popular fixed income ETFs of the past month couldn’t be more different. The iShares 20+ Year Treasury Bond ETF (TLT) and the iShares Treasury Floating Rate Bond ETF (TFLO) have taken in $5.4 billion and $3.2 billion, respectively, of new money over the past month, the most of any fixed income ETFs. 

But the types of Treasuries that the two ETFs hold and how they react to changes in interest rates are night and day. 

TLT holds Treasuries that pay a fixed interest rate and mature far in the future (more than two decades from now), while TFLO holds Treasuries whose interest rates adjust every week. 

That makes TLT much more sensitive to interest rate changes than TFLO. In fact, TLT is one of the most rate-sensitive fixed income ETFs on the market, while TFLO is one of the least. 

That’s why it’s interesting that both have seen large inflows over the past month.  

Investors typically gravitate toward floating rate notes when they believe interest rates have a good chance of going up. Because the rates on these instruments reset so frequently, they aren’t hurt when rates rise.  

Fixed Rate Treasuries

On the other hand, long-term, fixed-rate Treasuries are hit hard when interest rates spike. That’s the consequence of locking in an interest rate for so many years. 

But the opposite is also true. Those Treasuries can go up a lot if interest rates go down—which is something that many investors are starting to bet on. After all, TLT is the most popular fixed income ETF of the year, with $16.8 billion of year-to-date inflows. 

If the Fed is close to the end of its rate hiking cycle and interest rate cuts are in the cards for 2024, then it might make sense to own an ETF like TLT.  

With all that said, investors in TLT and TFLO aren’t necessarily making opposing bets. A barbell strategy of owning the least and most interest-rate-sensitive bonds is a strategy some investors are probably using. 

If rates go down, TLT will benefit. But if inflation makes a comeback and rates keep going up, then it helps to have some exposure to floating rate notes.