TLT Bond ETF Crashes And Burns: Buy Now Or Steer Clear?

(MENAFN- ValueWalk) Due to a series of interest-rate hikes in 2022 and 2023, retail stock and ETF investors are suddenly paying attention to the bond market and, as always, seeking ways to profit. Perhaps they've determined that Treasury bond yields of 4% to 5% are highly unusual, and once the Federal Reserve returns to its usual path of ultra-accommodative monetary policy, interest-rate cuts may come as fast and furiously as the hikes did.

Amid this backdrop, amateur traders have sparked unusually intense interest and high daily trading volumes in the iShares 20 Plus Year Treasury Bond ETF (NASDAQ:TLT) in recent months. Suddenly, a usually ignored fixed-income fund is red-hot and investors are piling in - but whether they ought to wager their hard-earned capital on a fast-falling bond ETF is far from assured.

Table of Contents Show
  • TLT: Make sure you're choosing the right fund
  • Interest in TLT is through the roof
  • Takeaway: This trend is not your friend TLT: Make sure you're choosing the right fund

    As the old saying goes, know what you own. Yet, I suspect that many traders who recently bought the TLT ETF don't know the basic facts about the fund. The most up-to-date fact sheet states that TLT has been around since 2002, has an expense ratio of 0.15% (which is quite low), and has holdings comprised of around 95% in Treasury bonds that mature in 20 years or longer, less than 5% in bonds that mature in 15 to 20 years, and a very small quantity in cash and derivatives.

    At this point, I should emphasize that TLT holds Treasury bonds, but it does not move up and down with bond yields. Rather, TLT tends to follow bond prices , which move in the opposite direction of bond yields. If you're in the market for something that tends to follow bond prices, check out the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT), which is basically the inverse fund to TLT.

    I sincerely hope that every prospective TLT buyer will at least browse through the fund's website and prospectus before making any purchases. Research is a part of responsible investing that will hopefully enhance your risk-adjusted returns and minimize the likelihood of severe portfolio-value drawdowns.

    Interest in TLT is through the roof

    Usually, retail investors don't crowd into a stock or fund until it has already gone up a lot. Thus, it's surprising to see so many traders flex their contrarian muscles and place long-leaning bets on TLT.

    I wonder whether they actually understand what they're doing. The annual 10-year Treasury bond yield recently reached 4.8%, a level not seen since the onset of the Great Recession. If anything, the typical momentum-focused amateur trader should be expected to bet against the TLT ETF and possibly consider buying TBT.

    Yet, that's not what's actually happening in 2023. Even after sinking from $170 during the 2020 COVID crisis to just $85 recently, TLT is somehow generating interest among the eager crowds.

    They're even buying call options on TLT, which only adds risk on top of risk. This isn't just catching a falling knife; it's an outright act of masochism at this point.

    The ultimate winner of this horrendous drawdown (besides the short-sellers, obviously) is the fund itself. While incautious TLT buyers hold increasingly heavier bags, one can only imagine the fund managers laughing all the way to the bank.

    Still, I would not blame the fund, but rather, the buyers. I like a good contrarian trade as much as anyone. However, I would never forget that seemingly cheap assets can always become cheaper - and the only lower limit to a stock or ETF is zero.

    Takeaway: This trend is not your friend

    Don't get the wrong idea; I understand the logic behind the long-TLT trade. Practically every short-term technical indicator is saying TLT is oversold. On some level, the idea that the TLT ETF is“due for a bounce” makes sense.

    Yet, I question the entire concept of any asset being“due for a bounce.” TLT undoubtedly seemed oversold and ready to rally in January, but it just kept going down from there. Hence, perhaps the right cliche to follow isn't“due for a bounce,” but rather,“Don't fight the Fed.”

    On the other hand, perhaps the right adage to use is,“The trend is your friend,” although in this case, it's the long-TLT investor's worst enemy. The Federal Reserve can move interest rates higher without the market's permission or blessing, and TLT can keep going down even after it's already in the gutter. Thus, investor should feel free to stay out of this particular trade and stick to market sectors that aren't crowded with anti-trend crusaders who are long on enthusiasm and woefully short on know-how.


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