BlackRock’s iShares funds dominate the list of most popular government bond exchange-traded funds (ETFs) for 2016. In fact, when calculated by assets under management (AUM), the five largest government bond ETFs as of March 4, 2016 are all iShares funds. The following is a summary of each of these ETFs.
iShares 1-3 Year Treasury Bond
With AUM of $12.58 billion, the iShares 1-3 Year Treasury Bond (NYSEARCA: SHY) provides liquid and stable exposure to the short-term Treasury market. Average daily dollar volume based on the trailing 45-day period is $207.72 million, which delivers the liquidity necessary to handle the largest institutional trades. With a duration of 1.8, the fund provides enough stability to be used as a higher-yielding and slightly higher-risk alternative to sitting in cash.
The ETF's expense ratio is 0.15%, which is the same for all BlackRock-issued government bond ETFs in the top five. Its distribution yield is 0.55% and its five-year annualized return is a money market-beating 0.67%.
iShares 7-10 Year Treasury Bond
As an intermediate Treasury ETF with AUM of $10.25 billion, the iShares 7-10 Year Treasury Bond (NYSEARCA: IEF) stretches its maturities to increase yield and sensitivity to interest rates. The fund’s daily trading volume of $356.61 million, which is the second largest of the top five government bond ETFs, provides efficient trade executions for institutional-sized trades.
The extended maturities in the fund’s intermediate holdings, which are evident from its 7.6 duration and a weighted average maturity of 8.49 years, deliver a distribution yield of 1.81%. The resulting rate sensitivity has worked in the fund’s favor, with five-year annualized returns of 5.39%.
iShares 20+ Year Treasury Bond
Investors seeking exposure to the long end of the yield curve can meet their objective with the iShares 20+ Year Treasury Bond (NASDAQ: TLT). The ETF, with $9.51 billion in AUM, limits it holdings to Treasuries that have at least 20 years to maturity. The result is a portfolio with a weighted average maturity of 26.76 years and the highest interest rate sensitivity of the five largest government bond ETFs, as reflected by the ETF's duration of 17.2.
The ETF ranks in the top 15 of all ETFs for dollar volume with an average of $1.34 billion per day, and has a distribution yield of 2.45%. It has thrived in the low interest rate environment of the last five years with an annualized return of 10.42%. However, the same interest rate sensitivity that resulted in double-digit returns also poses significant risk to investors in a rising-rate environment.
iShares 3-7 Year Treasury Bond
With the iShares 7-10 Year Treasury Bond taking the long end of the intermediate Treasury market, the iShares 3-7 Year Treasury Bond (NYSEARCA: IEI) works at the front end, which allows investors to be highly specific with their exposure on the yield curve. The ETF’s AUM of $6.34 billion and average dollar volume of $101.2 million make it suitable for large block trading.
The ETF has an average maturity of 4.69 years and a duration of 4.4. Like the other iShares government bond ETFs in the top five, this ETF avoids Treasury STRIPs to maximize payouts. The result is a distribution yield of 1.37%. Its five-year annualized return is 2.98%.
iShares Core US. Treasury Bond
As the third ETF in the top five funds providing intermediate-term exposure to Treasuries, the iShares Core US. Treasury Bond (NYSEARCA: GOVT) is not restricted to a specific time frame and can draw from the most opportune maturities on the yield curve, as determined by its portfolio managers. Despite this relative flexibility, the ETF’s weighted average maturity of 7.04 years and its 5.5 duration make it more sensitive to interest rate changes than the iShares 3-7 Year Treasury Bond, while paying a lower distribution yield of 1.22%.
The ETF has AUM of $1.97 billion and averages $22.3 million in dollar volume per day. Despite trading at a fraction of the volume of the four larger ETFs in the group, the fund’s liquidity allows for efficient executions in all but the largest institutional trades. It is the youngest ETF in the group, with an inception date of Feb. 14, 2012, so it does not yet have a five-year track record. However, its annualized return over the last three years is 1.8%.
The Bottom Line
The list of the five largest government bond ETFs is exclusively composed of iShares funds. Within this group, investors can select from short-, intermediate- and long-term exposure to Treasuries to find the best fit with their existing holdings, generate income and meet portfolio objectives.