U.S. government-issued bonds, also known as Treasury bonds, have been put through the wringer in recent years after historically high losses in 2022 due to multiple interest rate hikes.
Still, despite the recent turmoil, it’s worth remembering that historically, Treasury bonds have provided investors with tangible diversification, safety and income benefits over many market cycles.
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“Treasurys are perceived to be the safest security available given their extremely low probability of default, as they’re backed by the full faith and credit of the U.S. Treasury Department,” says Jeffrey Johnson, principal and head of fixed-income product at Vanguard.
Unlike corporate bonds, Treasurys are guaranteed by the U.S. government and thus possess a much higher credit rating and lower risk of default. As such, Treasury bond investors have much greater assurance that their interest payments will be received on time and their principal investment will be returned upon maturity.
“The biggest reason to consider Treasurys today is if there is a further flight out of risk due to an economic recession or further bank failures,” says Sam G. Huszczo, founder and chief investment officer of SGH Wealth Management.
A notable example of the diversification power of Treasurys was during the 2008 Great Recession, when investors piled into government debt as the “flight to quality” asset of choice. “During 2008, the ICE U.S. Treasury 20+ Year Treasury Index returned 33.8%, outperforming the S&P 500, which fell by 37%,” says Rohan Reddy, director of research at Global X ETFs.
To access Treasurys, investors can buy individual issues via TreasuryDirect or over the counter via a broker. A common strategy is constructing a Treasury bond “ladder” of various issues with staggered maturities, which can provide greater diversification and lower interest rate risk.
To make Treasury investing even simpler, an investor can also outsource management to an exchange-traded fund, or ETF. “Treasury bond ETFs allow investors to gain exposure through a stock-like instrument that trades on market exchanges,” says Tiana Patillo, financial advisor manager at Vanguard. “A Treasury bond ETF can provide greater liquidity, diversification and lower transaction costs.”
However, investors should familiarize themselves with some basic fixed-income ETF metrics before buying a Treasury bond ETF. “Key things to watch for include yield-to-maturity, which measures the expected return of the ETF assuming all bonds are held until maturity, and duration, which measures the sensitivity of the ETF’s price to changes in interest rates,” Reddy says.
Here’s a look at seven of the best Treasury bond ETFs to buy in 2023 while rates are high:
| Treasury bond ETF | Expense ratio |
| iShares iBonds Dec 2024 Term Treasury ETF (ticker: IBTE) | 0.07% |
| Vanguard Short-Term Treasury ETF (VGSH) | 0.04% |
| iShares U.S. Treasury Bond ETF (GOVT) | 0.05% |
| iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ) | 0.15% |
| Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) | 0.04% |
| The US Treasury 3 Month Bill ETF (TBIL) | 0.15% |
| SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) | 0.14% |
iShares iBonds Dec 2024 Term Treasury ETF (IBTE)
“Though not exactly the same as an individual laddered bond approach, target date maturity bond ETFs like IBTE can be a very efficient, low-cost way of implementing a similar strategy for the right account size,” Huszczo says. This unique ETF only holds U.S. Treasury bonds maturing between Jan. 1, 2024, and Dec. 15, 2024. Once 2025 rolls around, IBTE will liquidate and pay out its net asset value to investors.
The main benefit of a defined-maturity Treasury bond ETF like IBTE compared to individual bond issues is the ability to receive monthly distributions. While Treasury bonds usually pay interest income on a semi-annual basis, IBTE makes monthly payments. Investors also benefit from the liquidity of the ETF structure and greater transparency thanks to IBTE’s daily disclosure of portfolio metrics and holdings.
The Treasury ETF has an average yield to maturity of 5.1%.
Vanguard Short-Term Treasury ETF (VGSH)
“Vanguard’s Treasury bond ETFs consist of thousands of high-quality, diversified issues, and offer very consistent monthly distributions in all environments,” Patillo says. “Investors who reinvest these distributions right now are buying more shares each month at a discount, and these new shares continue to pay the full dividend, which is compounding at its finest.”
An ETF to watch is VGSH, which pays a yield to maturity of 4.2% right now due to the current inverted yield curve. As a result, Treasurys with a shorter maturity are paying out much greater yields right now. The ETF has an average duration of 1.9 years, meaning that if interest rates rose by 1 percentage point, VGSH would fall by 1.9%, all else being equal. The ETF charges a 0.04% expense ratio.
iShares U.S. Treasury Bond ETF (GOVT)
Investors who aren’t looking to make a specific yield curve play may like a one-size-fits-all, broadly diversified Treasury bond ETF like GOVT. Unlike IBTE or VGSH, GOVT does not target Treasurys from a specific maturity date range. Rather, the ETF tracks the IDC US Treasury Core Index, which holds a ladder of Treasurys ranging from one to 30 years in maturity.
A great way to think about GOVT is as the Treasury-bond-only equivalent of a total bond market ETF such as the iShares Core US Aggregate Bond ETF (AGG). In terms of metrics, GOVT’s portfolio of bonds averages out to a yield to maturity of 4.1% and duration of 6.2 years. This ETF is popular among some passive buy-and-hold investors due to its low expense ratio of 0.05%.
[See: 7 Top Equal-Weight ETFs to Buy]
iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ)
The longer a Treasury bond’s duration, the greater its sensitivity to interest rate movements will be. This can be detrimental during a rising rate environment, but a lifesaver when rates are slashed. The latter often occurs during times of economic crisis or market turmoil as the Federal Reserve attempts to stimulate the economy and market with lower interest rates.
Investors looking to make a high-risk bet on falling interest rates in case of an upcoming recession can make use of GOVZ, which invests in Separate Trading of Registered Interest and Principal of Securities, or STRIPS. These are Treasury bonds that have their coupon payments removed and are very sensitive to interest rates. Currently, GOVZ sports an average duration of 26.8 years.
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
“The exception to Treasurys being a great diversifier is when the broad economy is in an inflationary environment,” Johnson says. “In an inflationary environment, Treasury prices tend to go down as rates adjust higher to account for higher inflation.”
A unique type of Treasury bond that can be more resilient to inflation are Treasury inflation-protected securities, or TIPS. In the event of a sudden spike in inflation, the principal value of TIPS will adjust upwards, which also increases their coupon payments. This can potentially offset some of inflation’s eroding effects. An ETF like VTIP provides exposure to short-term TIPS with an average duration of 2.6 years. VTIP pays a yield to maturity of 3.8% and charges a 0.04% expense ratio.
The US Treasury 3 Month Bill ETF (TBIL)
Treasurys from the shortest end of the yield curve are known as Treasury bills, or T-bills. “T-bills tend to be highly liquid and have relatively low interest rate risk given their short time to maturity,” Johnson says. A unique T-bill ETF to watch is TBIL, which is one of the few single-bond ETFs on the market. Unlike the previous Treasury bond ETFs, TBIL will only hold the latest-issued 3-month T-bill at any given time.
Whenever a new 3-month T-bill is issued, TBIL will automatically roll over to it. This mechanic saves investors the need to continually repurchase and reinvest in individual T-bills, while also offering great liquidity and monthly distributions. With TBIL, investors can make precise yield curve plays as they would with a single Treasury bill issue. TBIL charges a 0.15% expense ratio and the 3-month T-bill yields 5.5%.
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
A more traditional alternative to TBIL is BIL, which holds a portfolio of T-bills tracking the performance of the Bloomberg 1-3 Month U.S. Treasury Bill Index. With BIL, investors receive exposure to a portfolio of 17 T-bills ranging in maturity from one month to less than three months. The ETF currently features an average duration of 0.1 years and a yield to maturity of 5.5%.
Given the attractiveness of short-term yields right now, BIL can be an excellent way of parking cash and earning income for a near-term investment objective, such as saving for a down payment without the worry of losing principal due to a market crash or rising rates. The ETF also makes monthly distributions, unlike T-bills, which only pay out at maturity.
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Update 06/01/23: This story was previously published at an earlier date and has been updated with new information.
