TLT Demand Surges: Will It Be the Next $100 Billion ETF?

Year-to-date inflows for the iShares 20+ Year Treasury Bond ETF (TLT) topped $10 billion last week as expectations for Fed rate cuts picked up steam.

TLT’s strong inflows this year have helped it cross the $59 billion Vanguard Total International Bond ETF (BNDX) as the third-largest U.S.-listed fixed income ETF on the market.

The fund’s $63 billion of AUM puts it behind just a pair of hundred-billion-dollar heavyweights: the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND), which have $117 billion and $114 billion, in managed assets respectively.

TLT vs AGG and BND

AGG and BND are broad market bond ETFs, providing investors exposure to a diversified basket of U.S. investment grade bonds. That includes Treasury bonds, mortgage-backed securities, and corporate bonds of varying maturities. In contrast, TLT is a much more narrowly focused fund, holding long-term Treasuries with more than 20 years until maturity.

TLT’s popularity has taken off over the past few years as interest rates have climbed. In May 2021, the ETF had $12 billion in AUM, less than a fifth of what’s invested in the fund today.

It will be interesting to see whether the torrid demand for TLT continues and whether the ETF can eventually top $100 billion in assets under management.

The longer interest rates stay above 4%, the more attractive TLT may be to investors who are looking for an interest rate sensitive fund that could appreciate significantly in price if rates head lower.

TLT's Versatility: Rate Speculation or Recession Hedge

Whether it is to speculate on interest rate movements or to hedge against an economic downturn, TLT is a versatile fund that can fit many portfolios.

Of course, if rates increase, TLT stands to get hit hard—which is something we saw earlier this year when interest rates on long-term Treasuries neared 5%. However, investors weren’t fazed by that; inflows picked up as rates moved higher. 

Instead, demand for TLT is most likely to cool under the opposite scenario. 

If rates drop notably, the price of TLT would spike, rewarding current investors. But it could also make the ETF less attractive for new investment as the potential downside in rates (and upside in price) diminishes.