With the recent market volatility, you might have encountered the term “flight to quality” or “flight to safety” in financial media. Simply put, this refers to the phenomenon where investors move their capital away from risky assets and into safer investments when economic conditions become uncertain.
When it comes to safe, conservative assets, few can rival U.S. government-issued Treasury bonds thanks to their lack of credit risk. These are debt securities that make you a lender to the U.S. government over the bond’s specified maturity.
“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 Dept.,” says Jeffrey Johnson, principal and head of fixed-income product at Vanguard.
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While you can buy individual Treasurys on TreasuryDirect.gov, you can also delegate the work to an exchange-traded fund (ETF) with a low expense ratio.
“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.”
These ETFs offer the benefits of professional management — portfolio managers and fixed-income traders handle the selection and rebalancing according to a strategy or benchmark index, you receive monthly income distributions in most cases, and you can easily view the ETF’s metrics on its webpage.
“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.
Given their rock-solid underlying assets, the flight to quality effects of these Treasury ETFs has historically materialized during severe market downturns. For instance, from January to March 2020, during the onset of COVID-19, the SPDR S&P 500 ETF (ticker: SPY) fell 19.4%, while the iShares U.S. Treasury Bond ETF (GOVT) held steady with no significant drawdowns.
Here’s a look at seven of the best Treasury bond ETFs to buy in 2024:
| ETF | Expense ratio | Yield to maturity |
| iShares U.S. Treasury Bond ETF (GOVT) | 0.05% | 3.9% |
| Global X 1-3 Month T-Bill ETF (CLIP) | 0.07% | 5.2% |
| Vanguard Short-Term Treasury ETF (VGSH) | 0.04% | 4.8% |
| Vanguard Intermediate-Term Treasury ETF (VGIT) | 0.04% | 4.4% |
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% | 4.6% |
| Amplify Samsung SOFR ETF (SOF) | 0.20% | 5.3%* |
| Alpha Architect 1-3 Month Box ETF (BOXX) | 0.19% | 5.6%** |
*30-day SEC yield as of July 31
**Average yield to option expiration
iShares U.S. Treasury Bond ETF (GOVT)
For broad, affordable Treasury exposure, few ETFs beat the aforementioned GOVT. This ETF tracks the ICE U.S. Treasury Core Bond Index, which holds just over 200 Treasury bonds ranging from one to 30 years in maturity. It charges a low 0.05% expense ratio, which works out to around $5 annually in fees assuming a $10,000 investment. Like most Treasury bond ETFs, GOVT pays monthly distributions.
Currently, investors can expect a 3.9% average yield to maturity, which is the theoretical total return expected if all of GOVT’s underlying Treasurys are held until maturity. Contrasting this is an average duration of six years. All else being equal, the net asset value (NAV) of GOVT is expected to rise by 6% should interest rates fall by 100 basis points, or one percentage point.
Global X 1-3 Month T-Bill ETF (CLIP)
The shortest maturity Treasury bonds are called Treasury bills, or T-bills. Most of these are issued with maturities ranging from four weeks to one year. Unlike most bonds, T-bills do not make semi-annual coupon payments. Instead, they are issued at a discount. Once they mature at the end of their term, T-bills can be redeemed for their face value, with the difference being the return earned by investors.
You can also access T-bills in ETF form. In this case, this ETF does the hard work of buying individual T-bills and rolling them over upon maturity. A popular example is CLIP, which, for a 0.07% expense ratio, tracks the Solactive 1-3 month U.S. T-Bill Index. This ETF features monthly distributions and currently pays a 5.2% yield to maturity, along with low interest-rate sensitivity, at a 0.1-year duration.
Vanguard Short-Term Treasury ETF (VGSH)
When you move up the yield curve beyond Treasury bills, you get Treasury notes, which range from two to 10 years in maturity. If you want to still remain on the short end of the spectrum, the ETF to pick is VGSH, which tracks the Bloomberg U.S. Treasury 1-3 Year Bond Index. This ETF currently features 96 holdings, paying a 4.8% yield to maturity with 1.9 years in duration.
Like most Vanguard ETFs, VGSH is extremely cost-effective, with a 0.04% expense ratio. However, if you want to avoid actively trading an ETF, it also comes in mutual fund form as the Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX). However, VSBSX does charge a higher 0.07% expense ratio and requires a $3,000 minimum investment, unlike VGSH, which goes for around $58 per share.
Vanguard Intermediate-Term Treasury ETF (VGIT)
The belly of the Treasury yield curve is captured by intermediate maturity Treasury note ETFs like VGIT, which tracks the Bloomberg U.S. Treasury 3-10 Year Bond Index. While not as broad as GOVT, VGIT offers similar portfolio metrics, with an average yield to maturity of 4.4% and an average duration of five years. It is also slightly cheaper, with an expense ratio that’s 0.01% lower than GOVT.
Given the similar exposures but differing benchmarks, an investor could use VGIT and GOVT as tax-loss harvesting partners. For instance, during high-inflation, rising-interest-rate years when Treasury ETFs performed poorly, an investor could sell either VGIT or GOVT to lock in a capital loss while simultaneously deploying the proceeds of that sale into the other ETF.
Vanguard Long-Term Treasury ETF (VGLT)
Treasurys with more than 10 years remaining until maturity are called Treasury bonds. These ETFs represent the long end of the Treasury yield curve and are highly sensitive to changes in interest rates. All else being equal, falling interest rates can give them a significant boost in price, while rising interest rates, like conditions observed in 2022, can significantly hurt them.
For long-term Treasury bond exposure, Vanguard offers VGLT at a 0.04% expense ratio. The benchmark for this ETF is the Bloomberg U.S. Long Treasury Bond Index, which currently holds 84 Treasurys with an average yield to maturity of 4.6% and a high duration of 14.9 years. All else being equal, VGLT has around 14.9% of upside return potential should rates fall by 100 basis points.
Amplify Samsung SOFR ETF (SOF)
Remember the London Interbank Offered Rate, or LIBOR? It was a global benchmark interest rate used to set borrowing costs for loans and financial products, but it was phased out due to concerns over its manipulation and lack of transparency. The replacement for LIBOR is the Secured Overnight Financing Rate (SOFR), which is based on transactions in the U.S. Treasury repurchase market.
Today, you can invest in an ETF tracking SOFR. “SOF is the first ETF to focus on the institutional oriented SOFR,” says Christian Magoon, CEO at Amplify ETFs. “We believe SOF offers investors an attractive mix of material income and low duration.” At a 0.2% expense ratio, SOF currently pays a 5.3% 30-day SEC yield, a standardized measure of income potential, while having very low interest-rate sensitivity.
Alpha Architect 1-3 Month Box ETF (BOXX)
Most, but not all, Treasury ETFs pay monthly distributions. However, some advanced ETFs can provide exposure to the returns of Treasurys, but in a more tax-efficient, total-return-oriented manner. A notable example is BOXX, which, for a 0.19% expense ratio, synthetically replicates the performance of a one-to-three-month Treasury bill ladder via the use of a multi-legged options strategy called a “box spread.”
To put it simply, BOXX uses a combination of different index call and put options to deliver a theoretically risk-free return. Currently, this strategy is paying a 5.6% yield to options expiration. However, instead of generating interest income that needs to be taxed and reinvested, the total return is reflected in the ETF’s net asset value, making it a potentially more tax-efficient Treasury ETF for most investors.
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7 Best Treasury ETFs to Buy Now originally appeared on usnews.com
Update 08/14/24: This story was previously published at an earlier date and has been updated with new information.
