Treasury exchange-traded funds (ETFs) enable investors to gain exposure to the U.S. government bond market through 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 Feb. 14, 2022, the 10-year Treasury yield was 1.98%, while it was 1.30% on Feb. 16, 2021. Yields have risen, especially since early last year, amid global supply chain disruptions and 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.
- Treasurys have significantly underperformed the broader market over the past year.
- Treasury exchange-traded funds (ETFs) with the best one-year trailing total returns are STIP, VTIP, and PBTP.
- The top holdings of these ETFs are Treasury inflation-protected securities (TIPS), which offer protection against the erosion of purchasing power due to inflation.
There are 47 distinct U.S. Treasury ETFs that trade in the U.S., excluding inverse and leveraged ETFs as well as ETFs with less than $50 million in assets under management (AUM). Treasurys, as measured by the Bloomberg U.S. Treasury Index, have significantly underperformed the broader market, providing a total return of -4.2% over the past 12 months compared with the S&P 500’s total return of 13.4%, as of Feb. 14, 2022. The best-performing Treasury ETF, iShares 0-5 Year TIPS Bond ETF (STIP).
We examine the three best Treasury ETFs below. All three are Treasury inflation-protected securities (TIPS), a type of Treasury security that is indexed to inflation to protect investors from a decline in the purchasing power of their money. Investors have flocked to TIPS over the past year amid concerns over rising inflation. Thus, the best Treasury ETFs, based on 12-month trailing return, are also the best TIPS ETFs. All numbers are as of Feb. 14, 2022.
- Performance Over One-Year: 3.7%
- Expense Ratio: 0.03%
- Annual Dividend Yield: 3.88%
- Three-Month Average Daily Volume: 1,052,162
- Assets Under Management: $9.4 billion
- Inception Date: Dec. 1, 2010
- Issuer: BlackRock Financial Management
STIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L), which is composed of TIPS with remaining maturities of less than five years. The ETF provides exposure to short-dated TIPS. The shorter time to maturity of these securities means lower risk faced by investors, but it also means lower yields than longer-dated securities. The fund allocates approximately 44% of its total assets to TIPS with maturities of between 3-5 years. The next largest allocation, at about 20%, are TIPS with maturities between 2-3 years. STIP's top three holdings are three different sets of TIPS maturing in April 2025, April 2023, and October 2024, respectively.
- Performance Over One-Year: 3.6%
- Expense Ratio: 0.04%
- Annual Dividend Yield: 3.40%
- Three-Month Average Daily Volume: 3,976,839
- Assets Under Management: $18.6 billion
- Inception Date: Oct. 12, 2012
- Issuer: Vanguard
Like STIP above, VTIP also aims to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index. The ETF's exposure to TIPS with relatively shorter maturities offers investors some protection against the possibility of rising interest rates compared to TIPS with longer maturities. However, that protection comes at the cost of generally lower returns. About 23% of the fund's assets are invested in TIPS with maturities between 2-3 years. The next largest allocation, at about 22%, is in TIPS with maturities between 3-4 years. VTIP's top three holdings are three different sets of TIPS maturing in January 2023, July 2023, and January 2024.
- Performance Over One-Year: 3.6%
- Expense Ratio: 0.07%
- Annual Dividend Yield: 2.64%
- Three-Month Average Daily Volume: 30,808
- Assets Under Management: $66.4 million
- Inception Date: Sept. 22, 2017
- Issuer: Invesco
PBTP tracks the ICE BofAML 0-5 Year U.S. Inflation-Linked Treasury Index, which gauges the performance of U.S. TIPS with maturities between one month and five years. The ETF, which invests at least 80% of its assets in securities that comprise the index, offers investors protection against the corrosive effects of inflation. Like the other two funds above, it is focused on TIPS with maturities of less than five years. About 84% of the fund's assets are invested in TIPS with maturities between 1-5 years, with the remaining assets allocated to TIPS with maturities of less than one year. PBTP's top three holdings are three different sets of TIPS maturing in April 2023, January 2026, and April 2022, respectively.
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