Investing in the government.
When you buy a Treasury bond, bill or note today, you’re literally investing in the U.S. government. Americans have been able to invest in U.S. Treasury securities in some form since 1917, when the federal government issued “Liberty Bonds” to support the American effort in World War I. Today, Treasurys are used to finance all kinds of government, including the military, infrastructure and public projects. They also play a vital role in investment portfolios, providing fixed income to help offset lean times in the stock market.
iShares 1-3 Year Treasury Bond ETF (ticker: SHY)
When interest rates head higher, existing bonds become less attractive (and decline in price) as investors flock to the newer bonds with higher yields. The longer the maturity of the bond, the more exaggerated the devaluation becomes because, in theory, they’ll be “underpaying” bond holders for longer. Shorter-maturity bonds aren’t as sensitive to rate hikes and are considered “safer.” But because there’s less risk that the bond will be repaid, short-term bonds don’t have to offer as much in yield. Enter iShares’ SHY, which invests in Treasurys with remaining maturities between one and three years, offering a modest yield but relative safety against rising rates.
SEC yield: 1.23 percent
Expenses: 0.15 percent, or $15 per $10,000 invested annually
iShares 20+ Year Treasury Bond ETF (TLT)
The TLT sits at the other end of the maturity spectrum. TLT only invests in Treasury bonds with remaining maturities greater than 20 years. Because the payout is less guaranteed than shorter-term bonds, TLT yields significantly more, but all of the bonds held in this ETF are highly rated, meaning credit agencies believe the U.S. is very likely to meet its obligations. However, while repayment risk isn’t really much of a factor here, TLT is historically much more sensitive to changes in interest rates.
SEC yield: 2.73 percent
Expenses: 0.15 percent
Vanguard Intermediate-Term Government Bond (VGIT)
Vanguard’s VGIT represents a nougaty middle ground between long- and short-term Treasurys, though it’s not necessarily perfectly in the center. VGIT invests in Treasurys with maturities between five and 10 years, though right now the average effective maturity of the fund is 5.5 years — meaning this leans closer to short than long. That balance can change over time, however. For right now, though, that means VGIT throws off an OK yield just south of 2 percent that isn’t a lot, but still better than most short-term government bond funds.
SEC yield: 1.85 percent
Expenses: 0.07 percent
Schwab U.S. TIPS ETF (SCHP)
Treasury Inflation-Protected Securities, or TIPS, are sold as protection against inflation. As explained by TreasuryDirect.gov, “The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index.” And when a TIPS security hits maturity, the owner is paid whichever is greater: the original principal or the adjusted principal. For the past few years, TIPS have offered small (and even negative!) yields, so no surprise that Schwab’s SCHP yields just 1.3 percent across its 40-holding portfolio. The average maturity of 8.5 years means there’s also a bit more interest rate risk.
SEC yield: 1.27 percent
Expenses: 0.05 percent
iShares Core U.S. Treasury Bond ETF (GOVT)
If you want broad exposure to Treasurys of varying lengths, you can buy several ETFs — or just buy GOVT, which provides all-in-one exposure across the maturity spectrum. GOVT is roughly 30 percent weighted in short-term bonds (one to three years), 54 percent in intermediate-term (five to 10 years) and 16 percent weighted in bonds of more than 10 years in maturity (with the lion’s share of that in bonds with 20 or more years remaining). While the other entries on this list can be used tactically, GOVT truly is a set-it-and-forget-it fund for investors who simply want to ensure they’re exposed to U.S. debt.
SEC yield: 1.74 percent
Expenses: 0.15 percent
PowerShares 1-30 Laddered Treasury Portfolio (PLW)
“Bond laddering” is a fixed-income investment strategy in which you stagger your bond holdings evenly across several lengths of maturity. Think of this as a more evenly spread version of what GOVT is trying to achieve. Six maturity ranges each sit between roughly 13 percent and 20 percent of the fund’s weight, with 3 percent in the zero-to-one-year range. Here, you get about 20 to 25 basis points more in yield, while still keeping a lid on volatility due to rate hikes.
SEC yield: 2.1 percent
Expenses: 0.25 percent
Goldman Sachs TreasuryAccess 0-1 Year ETF (GBIL)
If you really want to park the bus, Goldman’s GBIL is practically a high-yield savings account wrapped up as an ETF. GBIL invests in extremely short-term Treasurys of one year or less, with nearly three-quarters of the fund in bonds with durations between zero and six months. With GBIL, you can collect a small amount of interest and not worry about the fund moving. Its range since inception in September 2016 is $99.98 to $100.14 — a 0.1 percent difference from peak to trough. For perspective, TLT has moved as much as 21 percent in that time.
SEC yield: 0.87 percent
Expenses: 0.12 percent (includes 2-basis-point fee waiver)
Vanguard Extended Duration Treasury ETF (EDV)
The EDV invests in a funky zero-coupon Treasury security known as Separate Trading of Registered Interest and Principal of Securities (STRIPS). STRIPS are bought at a large discount to face value, then return face value at maturity. So how does EDV yield nearly 3 percent? Because investors must pay taxes on “accretion” even though they receive no income, EDV makes distribution equal to the tax payments. EDV sells bonds that drop below its maturity mandate, then buys slightly less in new bonds, funding distributions from the difference. Tactically, this is a play to make when you expect interest rates to decline.
SEC yield: 2.84 percent
Expenses: 0.07 percent
Sit Rising Rate ETF (RISE)
If you visit the Sit Rising Rate ETF’s provider site, you’ll be greeted with an interest rate defense calculator. By punching in a few simple metrics (like the average yield and maturity of your bond portfolio), you can find out what percentage allocation you’d need to make for RISE to cut down on your interest rate risk. RISE itself uses futures-related derivatives to hedge against two-, five- and 10-year Treasurys, “weighted to achieve a targeted negative 10-year average effective portfolio duration.” Thus, it’s designed to benefit from (surprise) rising rates. RISE is a very thinly traded ETF, however, so careful trading including use of limit orders is recommended.
SEC yield: N/A
Expenses: 0.5 percent
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9 Ways to Invest in America With Bond Funds originally appeared on usnews.com
