A fundamental principle in investing is that taking on risk should compensate you with a commensurate return. For instance, stock investments expose you to market risk — the possibility of losing money due to movements in the stock market — which is the trade-off for the opportunity to achieve substantial gains.
On the other hand, bond investors primarily navigate two different types of risks: credit risk, the danger of an issuer defaulting on their payments; and interest rate risk, the risk that bond prices will fluctuate due to changing interest rates.
Now, you can manage interest rate risk by choosing bonds with shorter maturities. However, if your goal is to minimize the risk of default, U.S. Treasurys are unbeatable. These securities are issued in several forms: T-bills, T-notes and T-bonds, varying by maturity from a few months to 30 years.
[Sign up for stock news with our Invested newsletter.]
“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.
While you can buy these securities directly through TreasuryDirect.gov, some find the platform’s user interface outdated and glitchy.
An alternative is to invest in Treasury bonds via an exchange-traded fund (ETF), which trades like a stock on exchanges and pools a collection of Treasurys. These funds offer regular monthly distributions but come with expense ratios paid to their asset managers.
“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.”
Here’s a look at seven of the best Treasury bond ETFs to buy in 2024:
| ETF | Expense ratio | Yield to maturity |
| Global X 1-3 Month T-Bill ETF (ticker: CLIP) | 0.07% | 4.8% |
| iShares Short Treasury Bond ETF (SHV) | 0.15% | 4.6% |
| SPDR Portfolio Intermediate Term Treasury ETF (SPTI) | 0.03% | 3.9% |
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% | 4.2% |
| iShares U.S. Treasury Bond ETF (GOVT) | 0.05% | 4.0% |
| Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) | 0.04% | 3.8% |
| iShares 25+ Year Treasury Strips Bond ETF (GOVZ) | 0.10% | 4.3% |
Global X 1-3 Month T-Bill ETF (CLIP)
“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. Both of these concepts can be seen in play with CLIP, which tracks the Solactive 1–3-month U.S. T-Bill Index.
This ETF currently has an expected yield to maturity of 4.8%, which measures its current theoretical total return potential. Against this is a duration of just 0.1 year, implying very low interest rate sensitivity. The price of CLIP does not fluctuate much — while it is not stable like a true money market fund, it is far less volatile than even short-term bond funds, making it a decent cash substitute.
iShares Short Treasury Bond ETF (SHV)
Investors willing to take on slightly higher duration exposure for the possibility of a higher yield to maturity can move up the yield curve via SHV. Whereas CLIP’s exposure ends at three-month T-bills, SHV extends that up to one year via the ICE Short U.S. Treasury Securities Index. This gives the ETF a 4.6% yield to maturity against an average duration of 0.3 year. SHV carries a 0.15% expense ratio.
Like CLIP, SHV can also be used as a cash equivalent or as a substitute for a money market fund. It is highly liquid, with a minimal 0.01% 30-day median bid-ask spread. In general, this ETF’s movements will be most influenced by movements in the short end of the yield curve. Investors can also expect monthly distributions, with an ex-distribution date typically landing on the first trading day of each month.
SPDR Portfolio Intermediate Term Treasury ETF (SPTI)
Intermediate-term Treasury notes span maturities of between two and 10 years. ETFs holding these bonds allow investors to target the belly of the yield curve, offering a balanced blend between interest rate risk and yield. They tend to be suitable as “Goldilocks” options for passive investors looking for affordable Treasury exposure but unwilling to actively manage their bond allocation.
For cheap intermediate Treasury exposure, consider SPTI. As part of State Street Global Advisors’ “Portfolio” lineup of SPDR ETFs, SPTI charges a very low 0.03% expense ratio. It tracks the Bloomberg 3-10 Year U.S. Treasury Index, which gives it an average 4% yield to maturity against a five-year duration. Like most generic Treasury ETFs, SPTI does not hold strip bonds or inflation-protected bonds.
Vanguard Long-Term Treasury ETF (VGLT)
High-risk investors may like the risk-and-return profile of long-term Treasury bonds. These trade with 10 or more years until maturity and comprise the long end of the Treasury yield curve. They tend to be highly sensitive to interest rates. In 2008, long-term Treasury bonds were a top performer due to rate cuts in response to a recession, but suffered greatly in 2022 as rates rose to combat inflation.
To access long-term Treasurys affordably, Vanguard offers VGLT. This ETF tracks the Bloomberg U.S. Long Treasury Bond Index, which gives it a 4.2% yield to maturity and a high 15-year average duration. All else being equal, VGLT’s net asset value (NAV) can be expected to rise by 15% should interest rates fall by 100 basis points. However, the opposite can happen should rates unexpectedly rise again.
[How to Invest During Rate Cuts]
iShares U.S. Treasury Bond ETF (GOVT)
The aforementioned Treasury ETFs each targeted distinct portions of the yield curve. If you’re looking for a “buy the haystack” approach to Treasurys, an ETF like GOVT might be appropriate. This ETF tracks the ICE U.S. Treasury Core Bond Index, which holds nominal Treasurys ranging from one-year to 30-year maturities. As with the previous ETFs, strip bonds and inflation-protected securities are not included.
GOVT’s exposure is fairly diversified in terms of maturity, with the bulk of its Treasurys sitting in the intermediate range of two to just under 10 years. In the aggregate, this ETF has an average yield to maturity of 4% against a 5.9-year duration. It is one of the most popular Treasury ETFs on the market, with over $28 billion in assets under management. GOVT charges a 0.05% expense ratio.
Vanguard Short-Term Inflation-Protected Securities ETF (VTIP)
When you invest in nominal U.S. Treasury securities, they pay a fixed interest rate that does not adjust with changes in inflation. This means that during periods of high inflation, the real value of the income you receive can decline significantly as the purchasing power of those fixed payments erodes over time. In contrast, Treasury inflation-protected securities (TIPS) are designed to mitigate this risk.
The principal value of TIPS adjusts according to changes in the consumer price index (CPI), a measure of inflation. As the principal increases with inflation, the interest payments, calculated on the adjusted principal, also increase. To access TIPS cheaply, Vanguard offers VTIP. This ETF has a yield to maturity of 3.8% and an average duration of 2.4 years. VTIP charges a 0.04% expense ratio.
iShares 25+ Year Treasury Strips Bond ETF (GOVZ)
Separate Trading of Registered Interest and Principal of Securities (Strips) are a special type of Treasury. When Treasurys are “stripped,” their interest and principal payments are separated and sold as individual securities. Because these Strips don’t pay periodic interest and are bought at a discount to mature at par value, their entire return comes from the price appreciation.
This structure makes Strips exceptionally sensitive to interest rate changes: Since they offer no periodic coupon payments to offset interest rate movements, their value is largely influenced by prevailing rates. In ETF form, you can access Strips via GOVZ. This ETF is particularly sensitive to interest rate movements, with a duration of 26.8 years. Currently, GOVZ offers a 4.3% yield to maturity.
More from U.S. News
7 Best ETFs to Invest in Corporate Bonds
7 Best Treasury ETFs to Buy Now originally appeared on usnews.com
Update 10/17/24: This story was previously published at an earlier date and has been updated with new information.
