What’s the Best Treasury ETF? 7 Options for Investors

A popular strategy for lower-risk, conservative investors has been to build a Treasury bond ladder. This involves purchasing Treasury bonds that mature at regular intervals.

For instance, in the first year, you might buy five different Treasury bonds, each with maturities of one year, two years, three years, four years and five years.

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As each bond matures, you can reinvest the proceeds into a new five-year bond. This process creates a steady stream of cash flow each year, mitigates interest rate risk by holding each bond to maturity and ensures payout due to the high credit quality of Treasurys.

However, managing a Treasury bond ladder isn’t as easy as managing a portfolio of a few stock picks. For one, you likely need to buy Treasurys on TreasuryDirect.gov, which has been criticized for its outdated user interface. Alternatively, you may need to go through your broker, and not all of them offer individual Treasurys.

In lieu of this, you can outsource the hard work to an exchange-traded fund (ETF). Depending on their objectives, these ETFs can target Treasurys of different maturities on the yield curve to achieve capital preservation, income or even offer you a way to speculate on possible interest rate changes.

“Treasury 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 ETF can provide greater liquidity, diversification and lower transaction costs.”

Furthermore, you get the liquidity of stocks given how ETFs trade, and with most Treasury ETFs, monthly distributions. Plus, many of these ETFs update their portfolio metrics on their webpages daily so you know exactly what’s under the hood.

“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.

Here’s a look at seven of the best Treasury bond ETFs to buy in 2024:

ETF Expense Ratio Yield to Maturity
Vanguard Intermediate-Term Treasury ETF (ticker: VGIT) 0.04% 4.7%
Vanguard Short-Term Treasury ETF (VGSH) 0.04% 5.1%
Vanguard Long-Term Treasury ETF (VGLT) 0.04% 4.9%
iShares U.S. Treasury Bond ETF (GOVT) 0.05% 4.7%
Global X 1-3 Month T-Bill ETF (CLIP) 0.07% 5.3%
Amplify Samsung SOFR ETF (SOF) 0.20% 5.2%*
Alpha Architect 1-3 Month Box ETF (BOXX) 0.195% 5.9%**

*30-day SEC yield.

**Average yield to option expiration.

Vanguard Intermediate-Term Treasury ETF (VGIT)

“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. Accordingly, Vanguard rates its intermediate Treasury ETF, VGIT as a “2/5” on a risk/reward scale.

For a 0.04% expense ratio, VGIT holds more than 100 Treasury bonds tracking the Bloomberg U.S. Treasury 3-10 Year Bond Index. Currently, investors can expect an average duration of five years and a yield to maturity of 4.7%. VGIT’s exact strategy is also available in mutual fund form as the Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX), but that version requires a $3,000 minimum investment.

Vanguard Short-Term Treasury ETF (VGSH)

VGIT’s duration of five years implies a roughly 5% inverse price change corresponding to each 100-basis-point change in interest rates, all else being equal. Rising interest rates may hurt it, while falling interest rates may benefit it. To minimize interest rate sensitivity further, investors should consider a short-term Treasury ETF like VGSH instead. This ETF replicates the Bloomberg U.S. Treasury 1-3 Year Bond Index.

The benchmark tracked by VGSH currently consists of 96 Treasury bonds averaging a 1.9-year duration. Thanks to elevated short-term interest rates, VGSH is also paying out a higher 5.1% yield to maturity. It charges the same 0.04% expense ratio as VGIT does, and also comes in a mutual fund variant as the Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX), with a $3,000 minimum.

[SEE: 9 of the Best Bond ETFs to Buy Now.]

Vanguard Long-Term Treasury ETF (VGLT)

Both the European Central Bank and the Bank of Canada recently announced cuts in their policy interest rates, from 4% to 3.75% and from 5% to 4.75%, respectively. Thus, some investors may be hoping that the U.S. Federal Reserve follows suit in the near future with a similar rate cut. To bet on falling rates, investors may wish to take on more interest rate sensitivity with a longer maturity Treasury ETF like VGLT.

This ETF tracks the Bloomberg U.S. Long Treasury Bond Index, which currently holds 82 Treasurys averaging 14.8 years in duration. All else being equal, a 100-basis-point reduction in rates could cause this ETF to gain around 14.8% in value. In terms of total return, investors can expect a 4.9% yield to maturity. As with VGSH and VGIT, VGLT also charges the same low 0.04% expense ratio.

iShares U.S. Treasury Bond ETF (GOVT)

Investors looking for a one-size-fits-all Treasury holding can use a broad-based ETF like GOVT over mixing-and-matching VGSH, VGIT and VGLT. This ETF tracks the ICE U.S. Treasury Core Bond Index, which holds just shy of 200 Treasury bonds ranging from one to 30 years in maturity. As an investment, it is extremely liquid and affordable, with a 0.04% 30-day median bid-ask spread and 0.05% expense ratio.

Overall, GOVT’s portfolio exposure looks very similar to that of VGIT, with a 5.9-year average duration and 4.7% average yield to maturity. The ETF also makes monthly distributions accrued from the interest paid from its underlying Treasurys, and recently went ex-dividend on June 3. For this month, the distribution of $0.05941 per share was paid out on June 7, and is taxable as ordinary income.

Global X 1-3 Month T-Bill ETF (CLIP)

Investors seeking a liquid and affordable alternative to high-yield savings accounts, money market funds or certificates of deposit (CDs) can use a Treasury bill, or T-bill, ETF like CLIP. This ETF only holds T-bills with a remaining maturity of at least one month to less than three months. By doing so, CLIP retains a rock-solid credit rating, but also immunizes itself from interest rate risk with a 0.1-year duration.

Because short-term rates are elevated right now, CLIP is paying out a very competitive 5.3% yield to maturity, with monthly distributions. But unlike money market funds and CDs, it has lower credit risk and no lock-up periods. This makes CLIP a potentially excellent candidate for both traders and investors looking to put spare cash in a brokerage account to work. The ETF charges a 0.07% expense ratio.

Amplify Samsung SOFR ETF (SOF)

The Secured Overnight Financing Rate (SOFR) represents the cost of borrowing cash overnight using Treasury securities as collateral. It provides a transparent and reliable interest rate that reflects the actual cost of short-term borrowing in the Treasury repurchase market. SOFR was introduced to replace the London Interbank Offered Rate (LIBOR), which faced issues with manipulation and reliability.

To track this benchmark, Amplify ETFs offers SOF. This ETF is designed to distribute monthly income that matches the SOFR, net of fees. The ETF’s holdings consist of short-term Treasury repurchase agreements which, at the time of writing, gives it a competitive 5.2% 30-day SEC yield while retaining high credit quality and low interest rate sensitivity. SOF charges a 0.2% expense ratio.

Alpha Architect 1-3 Month Box ETF (BOXX)

Income from Treasurys tends to be more tax-efficient than corporate bonds, but investors holding them outside of a tax-sheltered account like a Roth IRA will still have to pay some level of taxes. To avoid these altogether, you can use a synthetic ETF like BOXX. This ETF doesn’t actually hold Treasurys and thus does not make monthly income distributions. Rather, it uses an options strategy called a box spread.

A box spread is a strategy that involves buying and selling different options to create a virtually risk-free position that pays out at maturity, similar to holding a T-bill. Thus, the price chart of this ETF shows a steady upward, sawtooth pattern reflecting the total returns of an equivalent one-to-three-moth T-bill ladder. Currently, BOXX has a 5.9% average yield to option expiration and charges a 0.195% expense ratio.

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What’s the Best Treasury ETF? 7 Options for Investors originally appeared on usnews.com

Update 06/11/24: This story was previously published at an earlier date and has been updated with new information.

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