In Battle of Havens, Treasuries Outshine Gold for ETF Investorsby
U.S. government-bond funds have lured over $12 billion in 2016
Demand is strongest for maturities most vulnerable to selloff
Don’t call it a gold rush: For those seeking safety in 2016, U.S. government debt is the undisputed haven of choice.
The iShares 20+ Year Treasury ETF, which trades under the ticker TLT, has attracted more cash than any other exchange-traded fund in the U.S. this year, according to data compiled by Bloomberg. Investors have shoveled $2.9 billion into the ETF -- 30 percent of its assets -- in the fund’s longest streak of consecutive weekly inflows since its inception in 2002. It’s part of a flood of more than $12 billion into Treasury funds since Jan. 1, over three times the amount that’s flocked to gold ETFs.
Tumult in global stocks and high-yield debt has helped boost gold prices by 13 percent this year through Tuesday. Yet investors are stashing most of their cash in exchange-traded funds investing in Treasuries, even as gains of 2.4 percent lag behind those of the precious metal. The dash into U.S. debt may continue, with banks including Deutsche Bank AG still recommending clients load up on Treasuries.
“No matter how you cut it, TLT is one of the greatest organic diversifiers,” since it helps investors protect against stock-market losses without the leverage or derivatives often used by other hedging vehicles, said Eric Balchunas, a Bloomberg Intelligence ETF analyst.
The rush into long-term Treasuries may be setting investors up for pain, since the market is discounting the possibility of unexpected increases in rates or inflation, based on the so-called term premium. Strategists at Nomura Holdings Inc. said Tuesday that the Treasuries rally is “likely overdone,” the same day Citigroup Inc. analysts closed their recommendation to buy the 10-year Treasury note.
What’s more, most of the cash is going into long-term Treasuries, which suffer the worst losses from rising rates and inflation. This year’s inflows into TLT have outpaced inflows into short-term debt funds like the iShares Short Treasury Bond ETF and the iShares 1-3 Year Treasury Bond ETF.
TLT has one thing working in its favor -- historical performance. The fund has a better track record as a hedge against stock-market declines than State Street Corp.’s $28 billion SPDR Gold Shares fund, which trades under the ticker GLD, over the past year. That’s proven a boon for TLT with global stocks entering a bear market last week. The SPDR S&P 500 ETF Trust, the world’s largest ETF, which trades under the ticker SPY, has dropped 6.9 percent year to date.
Over the past 12 months, TLT and SPY have had an average negative correlation of 0.4, according to data compiled by Bloomberg. GLD and SPY, on the other hand, had an average ratio of less than 0.1. They were positively correlated from July 22 through Aug. 25 last year.
“Gold may or may not go up in a total crisis situation, whereas TLT is more likely to go up,” said Balchunas. “Gold is a wonderful diversifier, but as a total offset for market losses, you can’t count on it.”
U.S. debt is also less prone to big swings. The 30-day volatility measure for TLT is 15.3, while the same measure for GLD is 20.4. For the $13.2 billion iShares 1-3 Year Treasury Bond ETF, the largest fund focused on fixed-rate U.S. debt, it’s 1.0.
That helps explain why large institutions allocate more to Treasuries than they do to gold, Balchunas said. They’re likely to categorize gold as an “alternative” investment, meaning it doesn’t fall within their traditional allocation options. That shows up in the ETF ownership figures. About 39 percent of GLD is owned by institutions, compared to 69 percent for TLT.
“Treasuries are such a huge staple of any portfolio,” said Balchunas. “But gold is more controversial. There are plenty of people who won’t use it.”