Bonds are insurance against disaster in either the economy or the stock market, and bond ETFs are a good way to get bonds into your portfolio.
But in the eyes of one investing veteran, there's a particular bond ETF that stands out for providing disaster insurance. It's the iShares 20+ Year Treasury Bond ETF, traded on NASDAQ under the ticker symbol TLT.
"The U.S.-dollar long bond is the ultimate store of value when things go awry," Bernard Lahey, former chief investment officer for the Hydro Quebec pension fund and currency manager at the Caisse de dépôt, said in an e-mail.
Mr. Leahy offered his views on TLT after reading an instalment of the Globe and Mail ETF Buyer's Guide that covers bond ETFs.
Investors have been in a confident mood lately, and so TLT has suffered. For the year to Feb. 28, the total return of interest plus share price changes is a loss of 4.7 per cent. If the U.S. economy picks up and interest rates rise, this ETF could get hammered. The effective duration of the portfolio is just over 17 years, which means a rise of 1 percentage point in interest rates would result in a loss of 17 per cent (and vice versa if rates fall).
Mr. Lahey's case for considering some exposure to TLT is that it's an efficient way to diversify a portfolio to provide resilience in tough times. Unconvinced the current environment calls for this kind of portfolio insurance? Mr. Leahy says it's important to have assets that behave differently in your portfolio. You want investments that benefit from rising markets, and you want things that hold up in a down market. "Unless you have perfect foresight, it's not a good idea to bet all you have on a single outcome."
Canadians holding TLT would benefit in a market shock because money typically flows into the U.S. dollar in these situations. The value of TLT converted to Canadian dollars would rise in this case. And just as long bonds are most risky in good times for the economy, they benefit most in hard times.
Mr. Leahy believes investors on average don't hold enough bonds. Adding some TLT to other bond ETFs in your portfolio could address this, while providing some insurance against disaster. Just don't expect TLT to perform well in buoyant markets.