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

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

Fixed-income exchange-traded funds, or ETFs, can vary greatly in terms of credit quality. On one end, investors seeking high yields can opt for junk bonds, which pay greater interest rates in exchange for a higher risk of default.

On the other hand, those favoring maximum safety of principal may opt for U.S. government bonds, called Treasury bonds. Treasurys are issued in a wide range of maturities, but all share a similar characteristic: a lack of credit risk.

“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.

Short of a sovereign default or collapse of the U.S. central banking system, Treasury bond investors can be assured that they will receive interest payments on time and their principal investment at maturity. As such, these assets tend to be favored as the “flight to safety” asset during a market crisis.

“However, it’s important to note that the ‘risk-free’ nomenclature only refers to default risk,” Johnson says. “Treasurys are still vulnerable to rising interest rates, with those possessing maturity dates further out into the future being more sensitive to changes in rates,” he says.

Case in point: Many Treasury investors endured a notable year of double-digit losses in 2022 as the U.S. Federal Reserve aggressively hiked interest rates multiple times to quell sticky inflation.

“For instance, the ICE U.S. Treasury 20+ Year Treasury Index experienced a decline of 30.6% in 2022, compared to the Bloomberg High Yield Index, which experienced a relatively modest decline of 11.2%,” says Rohan Reddy, director of research at Global X ETFs.

However, Reddy notes that historically, Treasurys have been a great hedge against equity risk and market downturns. “During 2008, the ICE U.S. Treasury 20+ Year Treasury Index returned 33.8%, outperforming the S&P 500, which fell by 37%,” he says.

While investors can buy individual Treasury issues on TreasuryDirect or via their broker, using an ETF could provide additional benefits. “A Treasury ETF can offer greater liquidity, diversification and lower transaction costs than buying individual Treasury bonds,” Reddy says.

The mechanics of a Treasury ETF are slightly different than individual Treasury bonds, so knowing what to look for in terms of ETF metrics is important. “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:

Treasury ETFExpense Ratio
iShares U.S. Treasury Bond ETF (ticker: GOVT)0.05%
Vanguard Long-Term Treasury ETF (VGLT)0.04%
PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ)0.15%
iShares Treasury Floating Rate Bond ETF (TFLO)0.15%
Invesco Treasury Collateral ETF (CLTL)0.08%
iShares iBonds Dec 2025 Term Treasury ETF (IBTF)0.07%
The US Treasury 10 Year Note ETF (UTEN)0.15%

iShares U.S. Treasury Bond ETF (GOVT)

One of the key benefits of buying Treasurys is their diversification potential. “Treasury returns tend to have lower correlation with equities compared to corporate bonds,” Johnson says. By adding a Treasury allocation and periodically rebalancing the portfolio, investors can potentially decrease risk without impacting expected returns markedly.

For those looking for maximum diversification in the Treasury market, a good ETF to hold could be GOVT. This ETF tracks the IDC US Treasury Core Index, which holds a ladder of Treasurys ranging from one to 30 years in maturity. Currently, GOVT possesses an average yield-to-maturity of 4% and average duration of 6.2 years. The ETF charges a low expense ratio of 0.05%, or $5 annually for a $10,000 investment.

Vanguard Long-Term Treasury ETF (VGLT)

Long-term Treasury ETFs like VGLT have the highest volatility and sensitivity to interest rate movements thanks to their high duration. Currently, VGLT has an average duration of 16.1 years. “If interest rates increase by 1%, VGLT will lose about 16.1%. Conversely, if rates went down by 1%, VGLT will gain about 16.1%,” says Anessa Custovic, chief investment officer at Cardinal Retirement Planning Inc.

This makes VGLT a very potent hedge against equity risk. When markets crash and the Fed slashes interest rates in response, long-duration Treasury ETFs like VGLT can soar, which can help investors offset equity losses. On the other hand, VGLT can lose massive value when rates rise, as they did during 2022. VGLT currently pays a yield-to-maturity of 4% and charges an expense ratio of 0.04%.

PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ)

The longest-maturity, most volatile Treasurys are called Separate Trading of Registered Interest and Principal of Securities, or STRIPS. STRIPS are a special type of Treasury bond that has the coupon payments removed. Investors who buy STRIPS do so with the expectation of being paid out the face value of the bond at maturity.

STRIPS are highly volatile and sensitive to interest rate risk. Case in point, ZROZ currently possesses an average duration of 26.2 years. For investors looking to maximize the risk and return potential from a small bond allocation, holding STRIPS ETFs like ZROZ can provide enhanced exposure. ZROZ currently pays a yield-to-maturity of 3.6% and charges a 0.15% expense ratio.

iShares Treasury Floating Rate Bond ETF (TFLO)

“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,” he says. This type of environment would hurt longer-duration Treasury ETFs like VGLT and ZROZ the most.

To mitigate this, investors can buy TFLO, which holds floating-rate Treasury bonds. Unlike most Treasurys, the interest rates on these bonds “float,” meaning that they are variable over time depending on prevailing interest rates. Thanks to recent rising rates, TFLO currently pays a yield-to-maturity of 4.9% while sporting a very low duration of 0.01 years. The ETF charges a 0.15% expense ratio.

Invesco Treasury Collateral ETF (CLTL)

The shorter end of the Treasury yield curve deals with bonds possessing maturities of less than one year. These are called 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. These assets are as “risk free” as it gets, but generally don’t pay as high of a yield as longer-maturity Treasurys.

To access T-bills in ETF form, investors can buy CLTL, which tracks the ICE U.S. Treasury Short Bond Index. CLTL’s portfolio is comprised of Treasurys with a remaining maturity of 12 months or less. Thanks to the current inverted yield curve, CLTL is actually paying a higher yield-to-maturity of 4.6%, while possessing a low duration of 0.4 years. The ETF charges a 0.08% expense ratio.

iShares iBonds Dec 2025 Term Treasury ETF (IBTF)

Most bond ETFs maintain a constant duration by buying and selling Treasurys. This can be a problem for investors who need to reduce interest rate risk over time. A solution here is IBTF, which holds a portfolio of Treasurys all maturing between Jan. 1, 2025, and Dec. 15, 2025. Once the last bond in its portfolio matures, IBTF will liquidate and pay out its remaining value to investors.

Buying defined-maturity ETFs like IBTF can be a great way for investors to match the duration of their bond fund with their expected time horizon. For example, an investor who needs a down payment by 2025 can use IBTF to guarantee safety of principal and receive regular interest payments periodically. The ETF charges a 0.07% expense ratio and has other versions targeting different dates.

The US Treasury 10 Year Note ETF (UTEN)

UTEN is a single-bond ETF. Unlike most Treasury ETFs that hold a ladder of different maturities, single-bond ETFs only hold one Treasury at any time. In the case of UTEN, the ETF only holds the latest 10-year Treasury note, which is currently the one expiring Feb. 15, 2033, and paying a 3.5% coupon. Once a new 10-year note is issued, UTEN will switch to it.

“One benefit of single-bond ETFs like UTEN is that you will not have to reinvest at maturity like you would with an individual Treasury purchased at auction, as the ETF will usually automatically purchase newly issued bonds,” Custovic says. By buying UTEN, investors can target a specific maturity, benefit from the liquidity of an ETF, and receive monthly interest. The ETF charges a 0.15% expense ratio.

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