Tomahawk, WI 9/18/2013 (BasicsMedia) –  Exchange Trade Funds have been growing in popularity of late, with iShares Barclays 20+ Yr Treas.Bond (ETF) (NYSEARCA:TLT) leading the way. It tracks the investment results of both the U.S Treasury Bonds and Barclays U.S 20+ Year Treasury Bonds. However, for the bonds to quality for this ETF, they must have a maturity which is either equal to or greater than 20 years. It gets affected whenever there is any effect on interest rates within the U.S. Secondly, when inflation rises within the U.S, you can expect this development to have an impact on TLT as well. Why?

TLT’s Future Depends on Inflation and Interest Rates

If the inflation or interest rates keep rising, the cost of borrowing will shoot up. You can use the TLT to hold Treasury Inflation Protected Securities, commonly referred to as TIPS. These TIPS are often accompanied with the full faith of the U.S government, which acts as some sort of guarantee of the fact that you will get your interest in full as well as the premium regardless of interest rates or inflation. However, the price of these bonds often tends to fluctuate from the time they are issued until the moment they mature, presumably in 20+ years time.

TLT Operates in a Volatile Market

The level of volatility associated with TLT is quite moderate. However, if you decide to sell your bonds before they mature, you will not be talking about moderate volatility. If you take this path, you should not expect to receive the bond’s par value. TLT affects what you eventually earn after the maturity of your bonds. You will receive protection against inflation, and there is a very high possibility that the principle will also be adjusted upwards depending on the level of inflation experienced in the years prior to its maturity. This is good for you as an investor.

Common Risks Associated with TLT

The only danger with these types of funds at times is that you may be unable to enjoy full return on your principle amount which you invested in the first place. Within a very short span of time, the value of the fund may swing from one extreme to the other one thus causing you a lot of agony. In the recent past, interest rates as well as inflation within the U.S have hovered around the 1-3% level. If you can handle these rates, there is no problem with your decision to invest in TLT, and gain as much as you can from such types of investments.

In the recent years, TLT has been on the rise. The question I keep asking, together with many other analysts, is whether the rise will continue in the same trajectory or start falling down. As long as the interest rates do not shift to extremes, and the inflation is kept at more or less the current levels, I expect to see TLT continuing to rise for quite some time. It is now possible to see more than 3 million shares of TLT being traded on a single day. This is evident enough of the popularity of this stock in the market in this day and age.

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