Long Bond Fund Ranks as 2023’s Most Popular ETF

Long Bond Fund Ranks as 2023’s Most Popular ETF

While iShares’ TLT has raked in nearly $11 billion this year, the road ahead may be bumpy.

sumit
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Senior ETF Analyst
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Reviewed by: Lisa Barr
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Edited by: Ron Day

Exchange-traded fund investors are placing big bets on long bonds, hoping for a bounce-back.  

The iShares 20 Plus Year Treasury Bond ETF (TLT) is the No. 1 asset gatherer among U.S.-listed ETFs this year, with inflows of $10.8 billion. 

Investors in TLT have been betting on a rebound in Treasury bond prices after they had their worst year in modern history in 2022. 

So far, they’ve been right. The $38 billion ETF is up 4.9% this year after having fallen by 31.2% last year. 

Prices for Treasury bonds, which move inversely to yields, have bounced back as the Federal Reserve has signaled it may pause interest rate hikes starting this month. 

That would put at least a temporary end to the U.S. central bank’s rate hiking campaign that began in March 2022 and saw the Fed raise rates a whopping 500 basis points over 14 months. 

Markets are now anticipating the Fed may cut interest rates as soon as this year—something that would provide support to Treasury bonds and especially long bonds, which are some of the most interest-rate-sensitive bonds.  

TLT has a weighted-average maturity of 25.52 years and an effective duration of 17.45 years, meaning the price of the fund will rise or fall roughly 17.5% given a 1% change in interest rates. 
 
For context, the effective duration for the iShares Core U.S. Aggregate Bond ETF (AGG) is 6.3 years.  

Unlike some other forms of U.S. federal government debt with shorter maturities, near-term returns for long bonds are heavily influenced by price movements rather than just yield.  

The total return for the iShares 0-3 Month Treasury Bond ETF (SGOV) will almost exclusively come from its yield, while the total return for TLT—at least in the short term—will come from a combination of yield and price movements, with the latter overwhelming the former at times in which interest rates move significantly.  

Given that dynamic, some investors may be piling into TLT thinking that interest rates on the 30-year Treasury bond are going to fall from the current 3.85% level.  

They may very well be right, especially if interest rates revert to the lower levels they were at prior to the inflation surge of 2021 and 2022.  

But there is still risk involved. With the 30-year yield currently trading more than 115 basis points below the federal funds rate, at least some interest rate cuts have already been priced into long bonds. 

And if the Fed keeps rates at current levels for longer than anticipated, that could put upward pressure on the 30-year bond yield (and downward pressure on prices for TLT). 

In other words, investors in TLT are counting on the Fed to make substantial rate cuts.  

 

Contact Sumit Roy at [email protected] 

Sumit Roy is the senior ETF analyst for etf.com, where he has worked for 13 years. He creates a variety of content for the platform, including news articles, analysis pieces, videos and podcasts.

Before joining etf.com, Sumit was the managing editor and commodities analyst for Hard Assets Investor. In those roles, he was responsible for most of the operations of HAI, a website dedicated to education about commodities investing.

Though he still closely follows the commodities beat, Sumit covers a much broader assortment of topics for etf.com, with a particular focus on stock and bond exchange-traded funds.

He is the host of etf.com’s Talk ETFs, a popular video series that features weekly interviews with thought leaders in the ETF industry. Sumit is also co-host of Exchange Traded Fridays, etf.com’s weekly podcast series.

He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing chess and snowboarding in Lake Tahoe.