Bond Fund Seeks Redemption Amid Poor Performance

iShares 20+ Year Treasury Bond ETF Struggles Amidst Turbulent Market

The $37.6 billion iShares 20+ Year Treasury Bond ETF (ticker: TLT), renowned as a haven fund during times of volatility, is facing a setback due to its underwhelming performance. Despite its historic reputation as a safe haven, the fund has experienced disappointing returns.

According to Morningstar Direct, the fund’s total return for the current year stands at minus 14.3%, positioning it among the worst-performing funds in the U.S. bond ETF market. This unfortunate trend is observed in bond ETFs with assets exceeding $500 million.

Jamie Cox, managing partner for Harris Financial Group, explains that the prolonged maturity of the bonds exposes them to a significant impact from the Federal Reserve’s interest rate policies. Therefore, as short-term interest rates rise rapidly, the effect on longer-dated Treasuries becomes disproportionately adverse.

Surprisingly, despite the fund’s subpar performance, investors have continued to flock to it. In fact, as per Morningstar Direct, the fund has garnered over $17 billion in net inflows from January to September. Strikingly, this makes the ETF the third most popular U.S. ETF in terms of investor capital inflows this year.

Recognizing a unique opportunity amidst adversity, Cox believes that now is the time to consider purchasing bonds from this troubled fund. The discounted prices of fixed-income instruments, especially U.S. government bonds, are rarely available and should not be overlooked.

The Flight to Safety: A Look into Treasury Bonds and Junk Bonds

In 2024, experts predict a significant “flight to safety” due to the Federal Reserve’s efforts to combat inflation by increasing interest rates. This flight to safety will have varying impacts on different types of bonds.

Junk Bonds Outperforming Treasuries

While Treasury bonds face potential damage from rising interest rates, their riskier counterparts, junk bonds, have performed relatively well. The SPDR Bloomberg High Yield Bond ETF (JNK) has seen a 2.8% increase in value this year. Over a three-year period, annualized total returns stand at minus 0.55%. However, looking at a longer-term perspective of ten years, the fund has delivered total annualized returns of 2.4%, according to Morningstar data.

Credit Risk vs. Interest-Rate Risk

Todd Rosenbluth, head of research at VettaFi, notes that credit risk is being rewarded more than interest-rate risk. Taking on interest-rate risk in 2024 has been particularly punishing for investors due to climbing bond yields. When bond yields rise, interest-rate sensitive products tend to fall more than the broader market, while less interest-rate sensitive products suffer less.

TLT Struggles Amidst Rising Bond Yields

This year, the iShares 20+ Year Treasury Bond ETF (TLT) has faced challenges as bond yields continue to rise. Steve Laipply, global co-head of iShares fixed income ETFs for BlackRock, explains that TLT is performing as expected—delivering returns based on its basket of 20-plus Treasuries and closely tracking its benchmark.

As the market evolves, investors must carefully consider the dynamics between credit risk and interest-rate risk when making investment decisions.