Things change rapidly in the stock market and the global economy. At the beginning of 2020, investors were excited about the prospects of the equity market after its great performance in 2019. However, the recent sharp downturn in the stock market has changed that sentiment quickly and left many investors scrambling to find assets where they can avoid more downside risk. This is why safe-haven asset ETFs like TLT are in high demand and are rising in price seemingly every day.
TLT, which is the ticker symbol for the iShares 20+ Year Treasury Bond ETF, hit new 52 week highs of 155.59 this week. The question many investors are pondering is whether the performance will continue while the market looks for a bottom. In this article, we will be taking a detailed look at TLT so that you know a little more about how it might fit into your portfolio.
What is TLT Exactly?
Per the iShares website, TLT is an ETF that was created to track the investment results of an index composed of U.S. Treasury Bonds with remaining maturities greater than twenty years. It’s been around since the year 2002 and is traded on the NASDAQ. One of the perks about TLT is that it is a highly liquid security with a low expense ratio of 15 basis points. It’s essentially the easiest way to get exposure to U.S. treasury bonds, which are often considered by many to be a “safe-haven” asset.
Instead of literally purchasing treasury bonds, you can purchase this ETF that provides instant exposure to a basket of them. With TLT, it’s important to note that it never matures like traditional treasury bonds. Instead of receiving interest income, TLT buyers receive periodic dividend payments while they hold the ETF.
Why Is TLT Reaching New Highs?
During times of increased market volatility, oftentimes investors look to securities like TLT as a means of protecting themselves from downside risk. There have been several instances in the past of the prices of government bonds moving in the opposite direction of equity markets, which might help to explain why TLT has been performing so well as of late. As Coronavirus fears continue accelerating in the worldwide equity marketplace, and this is the main impetus behind the flood of money into TLT.
Why Are Treasury Bonds Considered Safe Investments?
The bond market is a lot different than the equity market. There are two main risks that people use to assess risk in bond, interest rate risk and credit risk. Credit risk is the risk that the issuer of the bond will default and therefore be unable to return the principal that was invested. The general thought process behind Treasury Bonds being safe is that the U.S. Government won’t be going out of business any time soon, so you can purchase them without worrying about credit risk. Even in dramatic scenarios where the Fed experienced balance sheet issues, investors can still rely on getting their principal back. On the other hand, interest rate risk is certainly on the table with an investment in Treasury securities, so keep that in mind. Whenever the Federal Reserve decides to cut interest rates, bond prices tend to rise. That means keeping an eye on monetary policy is crucial if you plan on investing in TLT.
Bonds have traditionally found their way into investor’s portfolios as a way of balancing out their equity risk exposure. Additionally, government bond prices are sometimes known to move in the opposite direction of stocks, which is a big reason why TLT can be used to hedge against equity downside risk.
Hopefully, this article has helped you gain a better understanding of TLT and why it’s performance has been so strong lately. TLT allows investors to easily purchase and sell government-backed bonds. Only time will tell if the rally in the Treasury Bond market continues, so make sure you assess your own risk tolerance profile before making any investment in TLT or any other security during this period of increased volatility.