This ETF Has a Double-Digit Yield and Could Surge 50%+ During a Recession

Talks of a “looming recession” have almost disappeared in the past two years due to the market rally looking unbeatable, but one is going to happen eventually, and it can take you by surprise. What if I told you the iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (BATS:TLTW) was the perfect “antidote” to such a future recession?

You’ll hear that there’s genuinely no “recession-proof” asset that benefits from a broad-based downturn. Sure, you can always go short on an asset, but you’ll lose out in the long run as the asset inevitably recovers. However, this is not true that there aren’t assets that benefit from a recession. TLTW is one example, and I will explain why. It might be the best one in the current environment, as it comes with a 14.87% yield and a monthly distribution.

Why TLTW thrives during economic downturns

Recessions are no cakewalk, and even the sturdiest of assets fail. That said, if the underlying asset is U.S. treasuries, recessions do benefit it. TLTW is a covered call ETF based on the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT | TLT Price Prediction). As the name suggests, it holds 20-year+ Treasuries, and they are unparalleled when it comes to safety. They carry a yield north of 4.5% right now, something that investors will rush to pay more for during a recession.

The rationale is twofold: a recession invites rapid interest rate cuts that automatically make high-yielding assets more attractive, and a recession starts to make investors prioritize safety over all else. TLT holds long-term Treasuries, so it will benefit from a severe recession.

Let’s look at what happened in 2008, for example. TLT surged from ~$90 in May 2008 to over $121 in late December. Prices then moderated, but quickly rose again in the coming years as the market realized that low interest rates were becoming the norm. TLT traded north of $170 during the aggressive 2020 interest rate cuts.

The covered call strategy and the catch

The secret to TLTW’s massive monthly yield is the covered call strategy. The ETF writes covered calls on the TLT to draw even more income from it. The TLT itself comes with a yield of 4.46%, distributed monthly. When you add the covered call overlay on top, this is how you get TLTW’s near-15% dividend yield.

So, what’s the catch?

As you may already know, covered call ETFs cap upside and take on the downside a little more. This means if TLT trades flat, TLTW can start to lose value. Similarly, if TLT declines, so will TLTW, and it will have a harder time recovering those gains due to the capped upside. The capped upside setup is akin to popular ETFs like the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI).

Why I’d buy TLTW hand over fist

Despite the capped upside, TLTW still offers you something that no other ETF does: an anti-recession vehicle with a massive dividend yield. Obviously, you should be careful with a covered call ETF that can tank if the underlying asset goes down. But in this case, I’m not too worried.

Why?

It is very unlikely that TLT goes down, because interest rates are going down. As long as that remains the case, TLT should actually go up as long-term Treasuries with high yields get more expensive and investors seek a higher safe yield. Thus, I believe TLTW has more or less found a bottom that it will end up bouncing back from. The ETF has been flat over the past 6 months and down in the past year, discounting the dividends. TLTW is up 13.81% in the past year if you factor in the dividends. This is an excellent return for an asset that can surge during a recession.

Capital gains are capped due to the covered call strategy, but it can easily give you a 50%-plus total return if a severe recession hits. I’d buy both TLT and TLTW to get the “best of both worlds,” as TLT will give more upside exposure, with the TLTW providing an amplified yield.