What’s behind the growing exodus from TLT ETF into SGOV and BIL?

The iShares 20+ Year Treasury Bond ETF (TLT) and the iShares 0-3 Month Treasury Bond ETF (SGOV) have diverged this year in terms of their inflows and outflows. This situation has escalated this year as the US-Iran war has continued, pushing inflation to the highest levels in years.

TLT ETF has shed $4.3 billion in assets

The iShares 20+ Year Treasury Bond ETF has been one of the worst-performing funds this year. Its stock has dropped by over 45% from its all-time high, and is hovering near its record low. 

Data shows that the ETF has shed over $4.3 billion in assets this year, bringing its assets under management (AUM) to $42 billion.

This performance mirrors that of other long-term US government bonds like the Vanguard Long-Term Treasury Index Fund (VGLT), which has shed billions of dollars in assets this year.

There are two main reasons for this. First, US government bond yields have soared in the past few months. The 30-year government bond yield jumped and crossed the 5% mark in May. While the yield has pulled back for now, analysts believe that it will keep soaring in the foreseeable future.

The main risk for the bond yields is that the public US debt has soared and will soon cross the $40 trillion mark. The Supreme Court has already ruled against Trump’s tariffs that would have led to more government revenue over time. While Trump has tools to impose tariffs, they are less effective than the ones he used.

Investors have also dumped long-term bonds because of the falling US reputation that has pushed some countries to avoid these purchases. China has reduced its US bond holdings from over $1.3 trillion to below $700 billion. 

This situation escalated after the start of the Russian-Iranian war, when US sanctioned Russia’s central bank assets. China believes that the US government may do the same when it launches its operation to take over Taiwan.

There was risk that some European countries would also start dumping their US bonds as Trump threatened to invade Greenland. Also, the ongoing Iran war means that some Gulf countries will reduce their exposure to the US.

SGOV and BIL ETFs are thriving

The ongoing TLT ETF outflows is happening at a time when investors are piling into short-duration funds. Data shows that the iShares 0-3 Month Treasury Bond ETF (SGOV has added over $23 billion in assets, bringing its assets to over $90 billion.

Similarly, the SPDR Bloomberg 1-3 Month T-Bil (BIL) ETF has added over $2.9 billion in assets this year, bringing its total assets to over $45 billion.

These funds, which resemble money market funds, have added substantial assets this year because of the elevated government bond yields amid the rising inflation. Data shows that the US Government 1 Month Government Bond Yield stands at 3.8%, which is quite attractive to income investors. 

This trend aligns with the ongoing inflows into money market funds. Data by FRED shows that the US money market assets under management has jumped to over $8.19 trillion this year from $7.2 trillion on the same day last year

Still, investors piling into BIL and SGOV are missing the strong rally in the stock market. Data shows that the BIL ETF has had a total return of 1.46% this year, while SGOV and TLT have returned 1.50% and 0.15%, respectively. In contrast, the S&P 500 and Nasdaq 100 indices have jumped by double digits.