TLT: iShares 20+ Year Treasury Bond ETF Has Appropriate Ticker (2024)

Introduction

I began my first career job in 1980 and started becoming a serious investor at that time. History said “Go long in US Treasuries.”, if you believed the Fed would end the high inflation that started in the late seventies. I believe US debt hadn't carried those yields since the Civil War.

Those high inflation rates were linked to OPEC tripling the price of oil. The US Treasuries saw yields peak at 15.81% in 1981 and have been on a steady decline, with minor interruptions, since. The question is when will the trend reverse for good, and not just shorts periods.

Over the past year, 30-Yr rates climbed from 1.5% to 2.4%, retraced back near 1.8% before the recent climb. We are currently in the inflation game called "Transitory", which brings me back to my title. Growing up, pinball machines were mechanical, not something you played on your phone or computer. One of the "rules of the game" skilled players did was "bumping" the machine to get extra action. Do it too hard and the game stopped and the letters TILT would appear. In today's investing world, either continued inflation or massive US government spending could push rates higher, causing long-term bond holders to see "game over". People disagree whether the Fed has their hands on both buttons controlling the ball's movement and Congressional actions are outside their control; they only can react afterwards.

The above chart shows how TLT has performed over the past year as the 30-year bond rate moved. A 100 bps upward move in rates caused TLT to drop over 15%, while the more recent 50bps drop allowed TLT to gain just over 10%. Those moves are driven by the long duration of TLT, which is why I am giving the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) a Very Bearish rating. As promised, better ETFs will be mentioned after we explore TLT.

Exploring the iShares 20+ Year Treasury Bond ETF

Seeking Alpha describes this ETF as

The fund invests in U.S. dollar denominated fixed rate U.S. treasury securities with remaining maturity of greater than or equal to twenty years. It seeks to track the performance of the ICE U.S. Treasury 20+ Year Bond Index. The ETF was launched by BlackRock in July 2002.

Source: seekingalpha.com TLT

Source: ishares.com TLT

One of the most important data points is the Effective Duration of 19.03 years. That translates into an expected price drop in the bonds held of 19% if rates raise 100bps. That is about what TLT holders experienced last fall and winter. Another two need to be compared against each other, those being the 2.64% WAC and the 1.91% AYM. Their relationship indicates that the average bond held is currently selling above Par. Using the raw holdings data, I calculated that overage to be 15%. That means, even if rated do not move, TLT will lose 15% of its value as its bonds mature, all else being equal.

Current Holdings

Source: ishares.com Holdings

All eligible securities must have a minimum term to maturity greater than twenty years at the rebalancing date, thus current maturity dates range for 2041-2051. The issue must also have $300m in Par value outstanding to remain in the Index, thus the ETF.

Distribution History

Source: seekingalpha.com

As you can see, the long-term distribution trend is not favorable. This is reflected in the Dividend grades given by Seeking Alpha to TLT.

Source: seekingalpha.com DVD grades

Unless rates raise quickly, TLT's average coupon will continue to drop as the next three bonds scheduled to drop off have coupons between 2.25-2.75%.

Overall, Seeking Alpha has assigned the following grades to TLT:

Source: seekingalpha.com

For more information on TLT, read the Factsheet.

Other ETF Choices

While there are probably a hundred ETFs I could have picked to compare TLT against, I picked three that are better prepared to handle an uptick in rates but still provide a yield close to what TLT is providing or the comfort of being 100% UST bonds. All data and descriptions are pulled from the Seeking Alpha homepage of each ETF.

iShares 3-7 Year Treasury Bond ETF (IEI)

The fund invests in U.S. dollar denominated fixed rate treasury securities with remaining maturity of greater than or equal to three years and less than seven years. It seeks to track the performance of the ICE U.S. Treasury 3-7 Year Bond Index. The yield is only .78% but with a duration of only 4.7, the pricing damage is about a fourth of what TLT would suffer.

Vanguard Short-Term Bond ETF (BSV)

The fund invests in the fixed income markets of the United States. It invests in investment-grade debt securities including the government, corporate, and international dollar-denominated bonds with maturities between 1 and 5 years that are rated BBB- or above by S&P. It seeks to replicate the performance of the Bloomberg Barclays U.S. 1-5 Year Gov/Credit Float Adjusted Index. The yield is 1.37% and the duration is only 2.8. Holdings are split between UST and Corporate bonds (73% UST, 27% Corp). I gave BSV a Bullish rating last winter.

Vanguard Short-Term Corporate Bond Index ETF (VCSH)

The fund invests in the fixed income markets of the United States. It primarily invests in U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility and financial companies which have maturities between 1 and 5 years. The fund seeks to track the performance of the Bloomberg Barclays U.S. 1-5 Year Corporate Bond Index. Yield matches TLT at 1.77% and has a 2.8 duration. This ETF is 100% Corporates, basically all investment-grade bonds.

This chart shows how each ETF did over the last two years, which includes the 2020 meltdown. As expected, the long duration of TLT made it the most volatile. The 100% corporate ETF showed the best CAGR but maybe the worst drop during the 2020 meltdown.

Portfolio Strategy

What's your call on where interest rates are going during the horizon of your owning any of the above ETFs? Other than TLT, the other three have below 5 durations, with two being below 3. If you want a bond ETF those are the place to be for a good combination of interest-rate risk and income. For those willing to take on more default-risk, there are ETFs like SPDR Barclays Capital Short Term High Yield Bond ETF (SJNK) who invest in ST Corporate bonds rated below investment-grade.

With recent events, I am giving the iShares 20+ Year Treasury Bond ETF (TLT) a Very Bearish rating. I am more positive on the other three as I believe rates are heading higher sooner rather than later and I don't want my investment to tilt!

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I have both a BS and MBA in Finance. I have been individual investor since the early 1980s and have a seven-figure portfolio. I was a data analyst for a pension manager for thirty years until I retired July of 2019. My initial articles related to my experience in prepping for and being in retirement. Now I will comment on our holdings in our various accounts. Most holdings are in CEFs, ETFs, some BDCs and a few REITs. I write Put options for income generation. Contributing author for Hoya Capital Income Builder.