The iShares 20+ Year Treasury Bond ETF (TLT) has a doomed strategy, picking up modest yield pennies on the inflation train tracks, notes Brett Owens, editor of Contrarian Income Report.
TLT is a "dumb" ETF that is run by machines. Rather than rely on computers, I prefer firms that have the inside track on the best bond deals. My favorite company, DoubleLine, has some excellent closed-end funds (CEFs) that are led by "bond god" Jeffrey Gundlach.
Among the many reasons to invest with Gundlach is that he and his all-star team of fixed-income analysts buy bonds that you and I can't, such as those paying up to 8.9%. issued by government-backed agencies like Freddie Mac. It's worth paying a management fee for "insider" access to these deals.
If these ideas sound esoteric, well, they are, and that's where the value is in "bond land". Without venturing around the globe, we're stuck with TLT paying a mere 1.9% (and losing that in price on the first trading day of the year).
This is why we take the elevator to floor two and pay Gundlach and Co. the "big bucks" management fee. "Big bucks" is tongue-in-cheek because when we buy one of DoubleLine's closed-end funds (CEFs) at a discount, we essentially get our fees "comped."
Fees come from NAV (net asset value, or the bonds the CEF holds minus any debt used to buy them), and we're paying 4% less than NAV today for first-class closed-end fund, DoubleLine Opportunities Fund (DLY). In other words, we're buying a dollar for 96 cents, giving us Gundlach's fee for free. The discount is 4% and his fee is 2.2%. Our fee is taken care of.
DLY was created to take advantage of income opportunities in mortgage-backed securities (MBSs), commercial MBSs and collateralized loan obligations (CLOs). I realize these acronyms can frighten anyone who lived through the financial crisis (or watched The Big Short), which is why we look to DoubleLine to navigate these waters. They are proven masters of this universe.
The fund's stormy start during the early days of the virus helped the team lock in higher credit quality than would otherwise be available with 7.6% yields. The "bond god" himself is our guy who got the call from Freddie Mac. We'll gladly buy his connections — and income streams. It's no wonder the DoubleLine CEFs pay so much more than Uncle Sam.
DLY is more prepared for higher rates, too. The fund's bond holdings have an average duration (time until they mature) of just over two years. This is impressively low and provides the fund with flexibility if interest rates were to rise more than we are currently expecting.
It won't get caught holding unfavorable bonds for years and lose both yield and price; it can move its money around to take advantage of rate changes. When buying bonds in 2022, don't tie up your money for ages. Stay nimble on duration, and only invest with the best.
