The stock market has experienced a lot of volatility this year, with a sharp spike in inflation and the Federal Reserve’s attempt at taming it by dishing out aggressive rate hikes six times. Recently, the central bank raised rates by 75 basis points for the fourth consecutive time.
Although a slowdown of monetary policy tightening is expected, Jerome Powell has dismissed the idea of pausing rate hikes soon. He stated, “We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
The rising interest rate environment has also affected government bond yields by creating an inverted yield curve, i.e., shorter-term bonds have higher yields than bonds with longer maturities. Long-term bonds have greater interest rate risk than their short- and medium-term counterparts, and rate hikes usually cause a drop in the prices of bonds far away from their maturity.
iShares 20+ Year Treasury Bond ETF (TLT) offers exposure to long-term U.S. Treasury Bonds. The fund seeks to track the investment results of an index composed of U.S. Treasury bonds with maturities greater than twenty years.
The ETF has lost 37.5% over the past year and 37.1% year-to-date. It has declined 7.6% over the past month to close its last trading session at $93.28.
The following factors might affect the fund’s performance in the near term:
Fund Stats
As of November 7, TLT’s NAV stood at $93.29. The fund has $22.36 billion in net assets. It has an expense ratio of 0.15%. As of November 4, the fund’s top holding is the United States Treasury, with 99.29% weight. The fund has a five-year monthly beta of 2.13.
The fund’s trailing-12-month dividend rate is $2.50, which yields 2.68% on the current price. Its average four-year yield stands at 1.96%. However, its dividend payouts have declined at a 7.5% CAGR over the past three years and 4.3% CAGR over the past five years.
POWR Ratings Reflect Bleak Prospects
TLT’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
TLT has a Trade grade of F and a Buy & Hold and Peer grade of D. In the 40-ETF Government Bonds ETFs group, it is ranked #26.
Click here to see the POWR Ratings for TLT.
View all the top funds in the Government Bonds ETFs group here.
Bottom Line
As the rate hike regime is expected to continue next year, long-term bond prices might decline further. Moreover, TLT’s declining dividend payouts look concerning. Hence, this ETF might be best avoided now.
How Does iShares 20+ Year Treasury Bond ETF (TLT) Stack up Against Its Peers?
While TLT has an overall POWR Rating of D, one might consider looking at its industry peers, iShares Short Treasury Bond ETF (SHV) and WisdomTree Floating Rate Treasury Fund (USFR), which have an overall A (Strong Buy) rating, and iShares 1-3 Year Treasury Bond ETF (SHY) and Vanguard Short-Term Treasury Index Fund (VGSH), which have an overall B (Buy) rating.
TLT shares rose $0.48 (+0.51%) in premarket trading Tuesday. Year-to-date, TLT has declined -35.43%, versus a -18.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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