Treasury exchange-traded funds (ETFs) provide investors with a way to gain exposure to the U.S. government bond market through investing in a stock-like instrument. Unlike individual bonds that are sold by bond brokers, bond ETFs trade on market exchanges. Treasury ETFs offer investors a way to gain passive, and often broad, exposure to U.S. Treasury bonds. They are composed of a basket of Treasury securities, typically with a focus on a particular maturity or range of maturities. On May 28, 2021, the 10-year Treasury yield was 1.58%, while it was 0.70% on May 28, 2020. Yields have risen, especially since the start of this year, as the economy continues to recover from the impact of the COVID-19 pandemic. The price of Treasury securities and their yield move in opposite directions, so rising yields mean falling prices and vice versa.

Key Takeaways

  • Treasurys have significantly underperformed the broader market over the past year.
  • The ETFs with the best 1-year trailing total return are IVOL, TDTF, and TDTT.
  • The top holdings of the first of these ETFs are shares of the Schwab U.S. TIPS ETF, and the top holdings of the other two are U.S. Treasury notes.

There are 42 distinct U.S. Treasury ETFs that trade in the U.S., excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). This list contains all U.S. Treasury ETFs, including Treasury Inflation-Protected Securities ETFs, or TIPS ETFs for short. Treasurys, as measured by the Bloomberg Barclays U.S. Treasury Index, have significantly underperformed the broader market with a total return of -3.7% over the past 12 months compared to the S&P 500's total return of 40.6%, as of May 27, 2021. The best Treasury ETF, based on performance over the past year,  is the Quadratic Interest Rate Volatility & Inflation Hedge ETF (IVOL). We examine the top 3 best Treasury ETFs below. All numbers below are as of June 1, 2021.

Quadratic Interest Rate Volatility & Inflation Hedge ETF (IVOL)

  • Performance over 1-Year: 10.8%
  • Expense Ratio: 0.99%
  • Annual Dividend Yield: 3.50%
  • 3-Month Average Daily Volume: 1,613,072
  • Assets Under Management: $3.2 billion
  • Inception Date: May 13, 2019
  • Issuer: CICC

IVOL is designed to hedge against interest rate volatility, a steepening yield curve, and inflation. It seeks to protect investors against the loss of purchasing power while providing opportunities to profit from changes in interest rates. The fund gains its main exposure to TIPS by investing in another ETF, the Schwab U.S. TIPS ETF (SCHP). But it also utilizes options in order to achieve its investment objectives.

FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF)

  • Performance over 1-Year: 7.8%
  • Expense Ratio: 0.18%
  • Annual Dividend Yield: 1.34%
  • 3-Month Average Daily Volume: 68,632
  • Assets Under Management: $617.2 million
  • Inception Date: Sept. 19, 2011
  • Issuer: Northern Trust

TDTF tracks the iBoxx 5-Year Target Duration Index, which is designed to measure the performance of TIPS targeting a modified adjusted duration of 5 years as well as TIPS with no less than one year and no more than ten years to maturity. The ETF provides protection against the corrosive effects of inflation as well as targeted duration exposure by investing in TIPS with an average duration of approximately five years. The fund can be used in either a buy-and-hold strategy or as a tactical play to shift allocation toward low-risk assets in anticipation of a sharp uptick in inflation. Its top three holdings include three different sets of U.S. Treasury notes.

FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT)

  • Performance over 1-Year: 7.8%
  • Expense Ratio: 0.18%
  • Annual Dividend Yield: 1.30%
  • 3-Month Average Daily Volume: 201,968
  • Assets Under Management: $1.5 billion
  • Inception Date: Sept. 19, 2011
  • Issuer: Northern Trust

TDTT tracks the iBoxx 3-Year Target Duration TIPS Index, which is designed to measure the performance of TIPS targeting a modified adjusted duration of 3 years as well as TIPS with no less than one year and no more than ten years to maturity. The ETF provides protection against the corrosive effects of inflation as well as targeted duration exposure by investing in TIPS with an average duration of approximately three years. TDTT may be used by investors to protect their portfolios from anticipated upticks in inflationary pressures. The fund's top three holdings include two different sets of U.S. Treasury notes and a set of U.S. Treasury bonds.

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.