Treasury exchange-traded funds, or ETFs, are traded like stocks on major exchanges. They consist of a portfolio of U.S. Treasury securities, with varying maturities from less than a year to 30 years. Introduced in the early 2000s, their popularity has grown, and there are now over 50 options available.
While not as thrilling as other securities, Treasury securities have experienced significant swings, making them a professional management option for those looking to mitigate portfolio risk. The COVID-19 pandemic has led to substantial changes in global interest rates, with the U.S. being a significant example. The U.S. 10-year Treasury yield reached a record low of 0.33% in March 2020, surged to 5.02% in October 2023, and settled at around 4.5% in early 2024. These shifts were driven by supply chain disruptions, high post-pandemic inflation, and the U.S. Federal Reserve’s interest rate increases. Key Takeaways: – Treasury ETFs hold a variety of U.S. Treasury securities, each with different yields, durations, and interest payments. – Investors should consider factors such as economic environment, fiscal and monetary policy, interest rate expectations, and the ETFs’ fees, track record, and holdings to align their choices with their investment goals and risk tolerance. – Treasury ETFs offer high credit quality, steady income, and relative liquidity. – They carry risks such as interest rate and market risks, and investors do not hold Treasurys directly but shares of the ETF. – Treasury ETFs are known for their lower costs compared to other ETFs, tax efficiency, and exposure to different maturities and bond coupons. What Are Treasury ETFs? Treasury ETFs are designed to track the performance of Treasurys, including short-, intermediate-, and long-term maturities of Treasury bills, notes, and bonds. They provide an efficient and convenient way for investors to gain exposure to U.S. government debt through a brokerage account. Investors typically use Treasury ETFs for income generation, capital preservation, and portfolio diversification. Conservative investors and those seeking a stable, government-backed income stream find them particularly appealing. More aggressive investors may use them to speculate on interest rate changes. Like all investments, they come with risks, mainly interest rate and inflation risks. Key Features of Treasury ETFs: U.S. Treasurys are backed by the full faith and credit of the U.S. government, offering a high level of security.Treasury ETFs hold U.S. Treasurys, which are debt instruments issued by the U.S. Department of the Treasury. These include Treasury bills, notes, and bonds.
Most Treasury ETFs are passively managed and designed to track the performance of a particular Treasury bond index. Each index has its own criteria, such as the maturities and types of Treasurys included. Treasury ETFs are traded on stock exchanges like individual stocks, combining the diversification of mutual funds with the liquidity and ease of trading of a stock. They have large institutional investors called authorized participants who can create new shares or redeem them by delivering the underlying securities to the fund in exchange for ETF shares (creation) or vice versa (redemption). This helps keep the ETF’s market price close to its net asset value. Though traded on exchanges like stocks, Treasury ETFs do not pay dividends. Instead, they pay interest income called distributions from the underlying Treasury securities. Distributions are usually done monthly and can vary depending on interest payments received from the Treasurys in the ETF’s portfolio. Like other ETFs, Treasury ETFs charge a fee for managing the fund, called the expense ratio, which is typically lower than that of actively managed funds. In the United Kingdom, India, and other commonwealths, the equivalent of a U.S. Treasury ETF exists. Treasury ETFs are low-risk and highly liquid, traded like stocks. You can buy and sell shares throughout the trading day at market prices, providing flexibility not available when buying Treasurys directly. Understanding how U.S. Treasurys are priced is important as their value depends heavily on changes in interest rates. Generally, as interest rates rise, existing bonds tend to decrease in value, and vice versa. This affects Treasury ETFs and the aggregate value of the U.S. Treasury they hold. Treasury ETFs are also valued for diversifying investment portfolios. With historically low correlation with stocks and other asset classes, they can serve as a hedge against market volatility or economic downturns, making them attractive for lowering portfolio risk. Treasury ETFs are fixed-income instruments with differing yields and durations depending on the maturities of the bonds they hold. Short-term Treasury ETFs are less sensitive to interest rate changes and offer lower yields, while long-term Treasury ETFs are more sensitive with higher yields. You can choose the ETF containing the Treasurys that best match your investment horizon, financial goals, and risk tolerance.S. Treasury security is a gilt security, traded through gilt ETFs and mutual funds. There are different types of Treasury ETFs. Short-term Treasury ETFs invest in Treasury securities with less than three years to maturity. Intermediate-term Treasury ETFs have maturities from three to 10 years. Long-term Treasury ETFs hold securities with maturities greater than 10 years.
Another category is Treasury inflation-protected securities (TIPS) ETFs. The principal value of TIPS adjusts with inflation as measured by the Consumer Price Index. Floating-rate Treasury ETFs put money into Treasury floating rate notes (FRNs), with interest adjusting according to short-term interest rates. They offer protection when interest rates rise. Zero-coupon Treasury ETFs invest in Treasury STRIPS, which are zero-coupon bonds created by separating the interest and principal of Treasury notes and bonds. They are bought at a discount and mature at face value. When investing in Treasury ETFs, consider your goals and risk tolerance. Assess the broader economic environment and U.S. monetary policy. Interest rates are also a key factor. When rates rise, the value of existing bonds falls. Treasury ETFs hold a portfolio of U.S. Treasurys, and longer-duration ETFs are more sensitive to interest rate changes. Consider the duration and maturity of the securities in the ETF. Short-term ETFs are less sensitive but offer lower yields. Assess the yield, which depends on maturities and interest rates. Higher yields come with more risk. Check the trading volume and liquidity of Treasury ETFs. This makes it easier to buy and sell shares without affecting the price. Review the expense ratio. A lower ratio is cost-effective for long-term investments. Treasury ETFs have tax implications including interest income and potential capital gains.Treasury ETFs hold U.S. Treasury securities and have grown in popularity for several reasons. Accessibility is one of the benefits. Treasury ETFs are widely accessible as they can be bought and sold like stocks through a brokerage account. There is no minimum investment requirement as in the case of some direct Treasury securities. Cost-effectiveness is another advantage. They have relatively low expense ratios compared to actively managed funds, which can increase returns over time. Credit quality is high as they hold risk-free U.S. Treasury securities. Treasury ETFs that hold TIPS and FRNs can offer protection against inflation, serving as a hedge. They also provide a regular income stream through interest payments from the underlying Treasurys, appealing to income-focused investors like retirees. Liquidity is essential as these instruments can be bought and sold on the stock exchange during trading hours. Tax efficiency is a plus as ETFs often have tax advantages over mutual funds. Transparency is ensured as ETFs are publicly traded and disclose their holdings regularly. Variety is available with more than 50 Treasury ETFs, allowing different investment positions based on the yield curve. However, Treasury ETFs also have risks and limitations. Interest rate risk is significant. When interest rates increase, the price of existing bonds typically decreases, and longer-duration Treasury ETFs are more sensitive to rate changes. Expense ratios, although generally lower than actively managed funds, still affect net returns in the long run.
Treasury ETFs offer safety and diversification. They are backed by the government, but still face market risks and potential tracking errors. Fiscal and monetary policy changes can affect their distributions. There are opportunity costs if other investments outperform, and relatively low yields compared to higher-risk options. Tax considerations include federal income tax on interest income and capital gains tax. Buying shares of Treasury ETFs involves evaluating financial goals, researching ETFs, opening a brokerage account, and choosing one that meets criteria. Consider the range of Treasury bonds held, yield, expense ratio, liquidity, and alignment with investment strategy. Once purchased, monitor performance as part of overall portfolio.
How to Invest in Treasury ETFs? If you already invest in the stock market, you’re halfway there. First, evaluate your financial goals, investment horizon, and risk tolerance to see how a Treasury ETF fits into your portfolio strategy. Next, research Treasury ETFs and review their maturity profile, yield, expense ratio, and performance history. If you’re a first-time investor, open a brokerage account. Choose a reputable broker considering trading fees, platform usability, and available research tools. Put funds into the account. Then, based on your research and goals, choose a Treasury ETF. Ask questions like what range of Treasury bonds it holds, how its yield compares, what the expense ratio is, how liquid it is, and if it aligns with your investment strategy and risk tolerance considering the safety and low risk expected from Treasury bonds. Once you’ve chosen and bought shares, monitor the performance as part of your overall portfolio. Look for changes in economic conditions, interest rates, and other factors affecting the ETF’s performance.Investing in Treasury ETFs can be a valuable strategy for diversifying your portfolio, offering safety, income, and liquidity. It is crucial to regularly review your entire portfolio to ensure it aligns with your investment goals and risk tolerance, and to adjust your investments accordingly. Like all investments, thorough research or consultation with a financial advisor is essential to ensure the suitability of Treasury ETFs for your financial situation.
The table below compares the top Treasury ETFs by assets under management (AUM), showcasing a strong market presence with a combined AUM of about $257 billion, and an average AUM of about $25.66 billion. The largest, the iShares 20+ Year Treasury Bond ETF (TLT), boasts $48.48 billion in AUM. These ETFs are consistent in their fees, with an average expense ratio of 0.11%, ranging from 0.04% for the Vanguard Short-Term Treasury ETF (VGSH) to 0.19% for the iShares TIPS Bond ETF (TIP). The distribution yield varies significantly, from 2.69% for the iShares US Treasury Bond ETF (GOVT) to 4.91% for the SPDR Bloomberg 1–3 Month T-Bill ETF (BIL), with an average of 3.48%. The average yield to maturity (YTM) for these 10 Treasury ETFs ranges from 3.90% to 5.36%, with an average of 4.54%. The maturity of the ETFs’ basket of Treasurys also differs, with the shortest weighted-average maturity being 0.09 years for the iShares 0–3 Month Treasury Bond ETF (SGOV) and the longest being 25.62 years for TLT, with an average maturity of 5.86 years. Here are the Top 10 Treasury ETFs as of January 2024: – TLT: iShares 20+ Year Treasury Bond ETF, $48.48 billion AUM, 0.15% Expense Ratio, 3.55% Distribution Yield, 4.47% Average YTM, 25.62 Years Maturity – BIL: SPDR Bloomberg 1–3 Month T-Bill ETF, $33.79 billion AUM, 0.14% Expense Ratio, 4.91% Distribution Yield, 4.99% Average YTM, 0.10 Years Maturity – IEF: iShares 7–10 Year Treasury Bond ETF, $27.50 billion AUM, 0.15% Expense Ratio, 2.96% Distribution Yield, 4.13% Average YTM, 8.36 Years Maturity – SHY: iShares 1–3 Year Treasury Bond ETF, $25.39 billion AUM, 0.15% Expense Ratio, 2.99% Distribution Yield, 4.44% Average YTM, 1.92 Years Maturity – GOVT: iShares U.S. Treasury Bond ETF, $22.64 billion AUM, 0.05% Expense Ratio, 2.69% Distribution Yield, 4.30% Average YTM, 7.65 Years Maturity – VGSH: Vanguard Short-Term Treasury ETF, $22.53 billion AUM, 0.04% Expense Ratio, 3.32% Distribution Yield, 4.30% Average YTM, 2.00 Years Maturity – VGIT: Vanguard Intermediate-Term Treasury ETF, $21.76 billion AUM, 0.04% Expense Ratio, 2.75% Distribution Yield, 3.90% Average YTM, 5.60 Years Maturity – TIP: iShares TIPS Bond ETF, $18.51 billion AUM, 0.19% Expense Ratio, 2.74% Distribution Yield, 4.20% Average YTM, 6.98 Years Maturity – SHV: iShares Short Treasury Bond ETF, $18.34 billion AUM, 0.15% Expense Ratio, 4.72% Distribution Yield, 5.27% Average YTM, 0.26 Years Maturity – SGOV: iShares 0–3 Month Treasury Bond ETF, $17.69 billion AUM, 0.07% Expense Ratio, 4.13% Distribution Yield, 5.36% Average YTM, 0.09 Years Maturity While some Treasury ETFs focus on short-term U.S. Treasurys, including those with maturities of about one year, there is no ETF that invests exclusively in one-year Treasury securities. Instead, these ETFs typically include a range of Treasurys with maturities from a few months to a few years. Technically, Treasury ETFs do not pay dividends, as those are a share of company profits. Instead, Treasury ETFs pay interest income and, at times, capital gains on the underlying U.S. Treasurys.Treasury ETFs provide investors with exposure to U.S. Treasury securities, which include short-term bills and long-term bonds. They are structured to replicate the performance of specific bond indexes by pooling investors’ money to purchase a portfolio of Treasurys.
These ETFs are considered safe in terms of credit risk, but they are subject to market and interest rate risks. Investors should weigh these risks against their overall investment strategy and risk tolerance. An inverse Treasury ETF is designed to perform in the opposite direction of Treasury securities. When Treasury bond prices fall, these ETFs increase in value, and when they rise, the ETFs decrease in value. They are typically used by investors anticipating a decline in Treasury bond prices, often due to predicted interest rate increases. Treasury ETFs are traded on exchanges like stocks, offering the liquidity and ease of stock trading combined with the creditworthiness of the U.S. government. They come in a variety of maturity profiles, yield potential, and sensitivity to interest rates, making them a flexible and cost-effective tool for managing risk, generating income, and diversifying portfolios.