The bond market, which underwent a noticeable slump in 2022, has continued to deteriorate throughout 2023, making it one of the most challenging years for fixed-income assets, especially when it comes to long-term, government-issued Treasurys.
A clear reflection of this adverse environment was when the yield on 30-year U.S. Treasurys surged to a 16-year high in early October, briefly topping 5%. After hitting a level unseen since before the 2008 financial crisis, investors are now bracing for a “higher for longer” interest rate environment.
“Our belief continues to be that a recession would eventually lead to a slowdown in inflation and would serve as a signal for the Federal Reserve to begin to signal monetary easing,” says Adam Grossman, global equity chief investment officer at RiverFront Investment Group. “However, we also believe that we are still facing a strong economy, so there is little reason to expect a strong downward shift in rates for the next few months,” he says.
The broad picture isn’t all bleak though. Treasurys with shorter durations — shorter-duration bonds have less sensitivity to interest rate fluctuations — have been more robust. Intermediate Treasury notes and short-term Treasury bills, in particular, have displayed commendable resilience amid the turbulence.
Moreover, despite these challenging market conditions, the creditworthiness of U.S. Treasurys as a whole remains unparalleled thanks to the ironclad backing of the U.S. government, even in the face of a rating downgrade by Fitch Ratings in August.
“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.
For investors looking to circumnavigate the complexities of individual Treasury purchases, Treasury exchange-traded funds, or ETFs, present a compelling alternative.
The main advantage of Treasury ETFs is transparency. These ETFs display a range of portfolio metrics on their webpages, which helps investors easily understand their risk-return exposure at a glance.
“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,” says Rohan Reddy, director of research at Global X ETFs.
[Sign up for stock news with our Invested newsletter.]
Moreover, these ETFs also offer the advantage of professional portfolio management at a reasonable fee, provide monthly distributions and trade with liquidity akin to stocks.
“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.”
Here’s a look at seven of the best Treasury bond ETFs to buy in 2023:
| ETF | Expense Ratio | Yield to Maturity |
| iShares U.S. Treasury Bond ETF (ticker: GOVT) | 0.05% | 5% |
| SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) | 0.1354% | 5.4% |
| iShares 3-7 Year Treasury Bond ETF (IEI) | 0.15% | 4.8% |
| iShares 10-20 Year Treasury Bond ETF (TLH) | 0.15% | 5.2% |
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% | 4.3% |
| Global X 1-3 Month T-Bill ETF (CLIP) | 0.07% | 5.6% |
| Invesco Short Term Treasury ETF (TBLL) | 0.08% | 5.4%* |
*Yield to worst, or the yield to maturity if the worst possible bond repayments are made.
iShares U.S. Treasury Bond ETF (GOVT)
For straightforward exposure to a broad swath of the Treasury market, investors can buy GOVT, which tracks the ICE U.S. Treasury Core Bond Index. This ETF currently holds 170 issues ranging from less than one year to more than 20 years in maturity. All in all, the ETF has an average duration of 5.7 years, which implies a moderate interest rate sensitivity.
At present, GOVT pays a yield to maturity, or YTM, of 5%. This is the theoretical yield an investor can expect should all of GOVT’s underlying holdings be held to maturity. In practice, this can fluctuate as the ETF buys and sells Treasurys to track its index composition. Investors who value low fees may like this ETF as it charges a very reasonable expense ratio of 0.05%.
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
“Based on a belief that short-term interest rates are likely going a little higher this quarter, BIL is a great ETF due to it having a very short maturity that allows for rapid reinvestment at the current rate,” Grossman says. “However, we would caution this as a long-term strategy — the Federal Reserve can quickly lower short rates if anything does go wrong in the economy.”
BIL offers exposures to the very short end of the Treasury yield curve, which consists of Treasury bills, also known as T-bills. By tracking the Bloomberg 1-3 Month U.S. Treasury Bill Index, BIL delivers a very low interest rate sensitivity with a duration of 0.1 years, while benefiting from the currently high short-term yields with a YTM of 5.4%. The ETF charges a 0.1354% expense ratio.
iShares 3-7 Year Treasury Bond ETF (IEI)
“If a mild recession is expected, the historic track record indicates that the short and intermediate part of the curve is usually the part that experiences the most contraction initially,” Grossman says. “Since bond prices can go up as a function of the duration, we would argue that the sweet spot for a mild recession is in IEI — which is a three-to-seven-year Treasury ETF.”
By tracking the IDC US Treasury 3-7 Year Index, IEI delivers a duration of 4.4 years against a 4.8% average yield to maturity. This ETF may be ideal for traders due to its high liquidity, with an average 30-day volume of more than 2.4 million shares exchanged along with a very low 30-day median bid-ask spread of just 0.01%. IEI charges a 0.15% expense ratio.
[7 Best Money Market Funds to Buy for Safety]
iShares 10-20 Year Treasury Bond ETF (TLH)
“If a severe recession is expected, the mechanics are similar to the mild recession, although long rates also are likely to go down meaningfully as well,” Grossman says. “This makes TLH, which tracks 10-to-20-year Treasury bonds, potentially attractive, as the impact of even a small shift in long rates can lead to large price appreciation of these bonds.”
By tracking the ICE US Treasury 10-20 Year Bond Index, TLH delivers a high 12.9-year duration. All else being equal, the ETF can be expected to gain 12.9% in value should rates be cut by 100 basis points (i.e., one percentage point), but the opposite can occur if rates rise further. This makes the ETF a risky bet for investors who believe that a rate cut is on the horizon. TLH also charges a 0.15% expense ratio. TLH has an average yield to maturity of 5.2%.
Vanguard Long-Term Treasury ETF (VGLT)
“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 … and these new shares continue to pay the full dividend, which is compounding at its finest.”
Another option for risk-tolerant investors betting on the long end of the Treasury yield curve is VGLT. This Vanguard ETF tracks the Bloomberg U.S. Long Treasury Bond Index, giving it an average duration of 15.6 years. As a result, VGLT is even more sensitive to interest rate fluctuations compared to TLH. However, the ETF does come in at a significantly lower 0.04% expense ratio. The current yield to maturity is 4.3%.
Global X 1-3 Month T-Bill ETF (CLIP)
While the earlier-mentioned BIL is one of the most popular T-bill ETFs on the market, boasting nearly $32 billion in assets under management, it’s not the most cost effective. For a cheaper alternative, investors can buy CLIP, which debuted in June 2023 and has since attracted about $78 million in net assets. With a 0.07% expense ratio, this ETF is roughly half as expensive as BIL.
CLIP tracks the Solactive 1-3 month US T-Bill Index, which — as its name suggests — holds a portfolio of T-bills with one to three months in maturity. Currently, this translates to an average duration of 0.1 years and YTM of 5.6%.
Invesco Short Term Treasury ETF (TBLL)
“Short-duration Treasury yields have become increasingly attractive for investors in 2023,” says Brian McMullen, fixed-income ETF strategist at Invesco. “The yields on Treasurys with three to 12 months until maturity have increased anywhere from 70 to 113 basis points year to date in 2023, and have increased over 500 basis points since January 2022, currently yielding around 5.5%.” At the time of this writing, the rates had receded slightly, but the one-year Treasury was still yielding more than 5.4%.
Investors looking to take advantage of this can do so via TBLL, which offers both high yields and low duration at a competitive 0.08% expense ratio. “For investors seeking high-quality yield and shelter from interest rate volatility, short-duration Treasurys have provided a relatively attractive risk/return profile over the past 12 months,” McMullen says.
More from U.S. News
7 Best Long-Term ETFs to Buy and Hold
If I Buy a $500K Annuity, What Will It Pay Annually?
6 of the Best High-Dividend ETFs
7 Best Treasury ETFs to Buy Now originally appeared on usnews.com
Update 10/10/23: This story was previously published at an earlier date and has been updated with new information.
