Evaluating the Attractiveness of High-Yield Treasury-Linked ETFs in a Rising Rate Environment

The FT Vest 20+ Year Treasury & Target Income ETF (LTTI) has emerged as a high-yield option for income-focused investors, offering a distribution rate of 8.76% as of July 31, 2025 [1]. However, its appeal in a rising interest rate environment must be scrutinized through the lens of risk-adjusted returns and distribution sustainability. This analysis examines LTTI’s structure, historical performance, and risk metrics to determine whether its high yield justifies the inherent risks.

Strategic Design and Duration Risk

LTTI’s primary objective is to generate current income by investing in U.S. Treasury securities and employing a call option strategy on the iShares 20+ Year Treasury Bond ETF (TLT), which constitutes 98.25% of its holdings [1]. The fund’s weighted average effective duration of 16.22 years [1] exposes it to significant interest rate sensitivity. In rising rate environments, long-duration bonds typically underperform as investors demand higher yields for new investments, causing existing bonds to lose value. For example, during the 2022–2023 rate hikes, the Federal Reserve increased the federal funds rate by over 5 percentage points, leading to sharp declines in long-term Treasury prices [2]. LTTI’s high duration suggests it would face similar downward pressure in such scenarios.

Risk-Adjusted Returns: A Mixed Picture

LTTI’s Sharpe ratio of 0.27 and standard deviation of 12.62% [3] indicate subpar risk-adjusted performance. The Sharpe ratio, which measures excess return per unit of volatility, is particularly sensitive to rising interest rates because the risk-free rate (used in its calculation) increases, reducing the numerator [4]. Historical data from similar bond strategies, such as the Yieldstream High Yield bond strategy, show Sharpe ratios as low as 0.1 during aggressive rate hikes (e.g., 1994–1995) [5]. While LTTI’s option strategy may mitigate some losses by generating income from call premiums, its average option overwrite percentage of 15.48% [1] suggests limited hedging capacity.

Distribution Sustainability: A Double-Edged Sword

The fund’s 8.76% distribution rate is enticing, but its 30-day SEC yield of -0.58% [1] raises concerns about sustainability. A negative SEC yield implies that the fund’s net investment income is insufficient to cover distributions, potentially requiring the return of capital or reliance on option premiums. During periods of rising rates, the value of the underlying TLT ETF may decline, reducing the income generated from call options and exacerbating the gap between distributions and income. For instance, in 2022–2023, TLT’s price dropped by over 20% as rates surged [2], which could have strained LTTI’s ability to maintain its payout.

Historical Context and Investor Considerations

While LTTI’s performance during past rate hikes is not explicitly documented, broader trends in long-duration bonds provide cautionary insights. Between 2015 and 2018, gradual rate increases led to a 10% decline in 20+ year Treasury prices [2]. LTTI’s high duration and non-diversified structure (concentrated in TLT) amplify its vulnerability to such shifts. Investors must weigh the allure of high yields against the potential for capital depreciation and distribution cuts.

Conclusion

LTTI’s high-yield profile is a compelling feature, but its attractiveness in a rising rate environment hinges on two critical factors: the fund’s ability to sustain distributions despite negative SEC yields and its capacity to weather duration-driven losses. While the option strategy adds a layer of income generation, it may not offset the risks posed by long-duration exposure. Investors seeking stable income in volatile rate environments should carefully assess LTTI’s risk metrics and consider alternatives with shorter durations or more robust hedging mechanisms.

Source:
[1] FT Vest 20+ Year Treasury & Target Income ETF (LTTI) [https://www.ftportfolios.com/Retail/Etf/EtfSummary.aspx?Ticker=LTTI]
[2] Federal Funds Rate History 1990 to 2025 [https://www.forbes.com/advisor/investing/fed-funds-rate-history/]
[3] LTTI: FT Vest 20+ Year Treasury & Tgt Income ETF [https://www.etfreplay.com/etf/ltti]
[4] Understanding Hedge Fund Quantitative Metrics [https://resonanzcapital.com/insights/understanding-hedge-fund-quantitative-metrics-a-handy-cheatsheet-for-investors]
[5] Trend-following on High Yield bonds in a rising interest rate environment [https://www.yieldstream.com/blog/18/Trend_following_on_High_Yield_bonds_in_a_rising_interest_rate_environment]