Investors Flock to TLTW, Turbocharged Version of TLT

The fund has picked up $731 million since its launch last year.

A turbocharged version of this year’s most popular bond ETF is in high demand. 

The iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW) has registered inflows of $731 million so far in 2023—quite a sum for a fund that launched just over a year ago. 

TLTW, which currently has $650 million in AUM, combines a position in the iShares 20+ Year Treasury Bond ETF (TLT), with a covered call writing strategy.  

TLT is, of course, the wildly popular bond ETF investors can’t get enough of. It’s picked up $17.8 billion of inflows this year on bets for a long bond rebound. 

That rebound hasn’t yet materialized. In fact, the fund is down 10% this year on a total return basis. TLTW has fared better; it’s down 2.6% thanks to the income from writing calls. 

The ETF sells one-month call options to generate income. That additional income comes on top of the yield the fund gets from holding Treasuries via TLT.  

TLTW, High-Calibur Version of TLT, Grabs Call Option Income 

The income from options writing can be substantial, especially when those options are pricey. The implied volatility of TLT call options—a key determinant of the price of those options—increased significantly over the past month as volatility in bond markets spiked.  
 
That translates into extra money in the pockets of TLTW investors, though it hasn’t been enough to offset the drop in the price of TLT.  

Going forward, if bond prices and yields stabilize, then TLTW investors may be able to reap the rewards of the ETF’s call writing strategy. 

A combination of the income from holding long-term Treasuries and writing calls could lead to double digit returns for investors in TLTW.  

The ETF’s yields 18.5% based on the last twelve months of distributions, while it yields 12.5% based on annualizing the most recent distribution. For comparison, TLT currently yields around 5%. 

Trade-off and Potential Downside 

Of course, that extra yield doesn’t come for free. Investors in TLTW are giving up potential price appreciation should long-term Treasury bond rally. 

The ETF sells call options that are 2% out of the money. If TLT rallies more than 2% in a month, TLTW doesn’t benefit from any of that upside. 

On the other hand, if bond prices and TLT continue to decline, TLTW is exposed to that downside—though its extra yield helps offset some of those losses. 

In other words, TLTW gives up potential price appreciation in exchange for current income, the same as any covered call writing ETF. It’s a strategy that may appeal to investors who expect range-bound bond markets or even those who expect only modest upside in bond prices from here.