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.
- Treasurys have underperformed the broader market over the past year.
- The Treasury ETFs with the best 1-year trailing total return are ZROZ, EDV, and TLT.
- All three of these ETFs are composed of long-dated U.S. Treasury securities.
The Treasury ETF universe is comprised of about 25 ETFs, excluding inverse and leveraged ETFs, as well as funds with less than $50 million in assets under management (AUM). Treasurys, as measured by the Bloomberg Barclays US Treasury Index, have underperformed the broader market. They posted a total return of 6.7% over the past 12 months compared to the S&P 500's total return of 22.2%, as of August 28, 2020. The best Treasury ETF, based on performance over the past year, is the PIMCO 25+ Year Zero Coupon U.S. Treasury Index Fund (ZROZ). We examine the top 3 best Treasury ETFs below. All numbers below are as of August 31, 2020.
- Performance over 1-Year: 14.1%
- Expense Ratio: 0.15%
- Annual Dividend Yield: 1.82%
- 3-Month Average Daily Volume: 58,392
- Assets Under Management: $458.6 million
- Inception Date: October 30, 2009
- Issuer: PIMCO
ZROZ offers exposure to long-dated Treasurys, allowing investors to extend the effective duration of their fixed-income portfolios. The fund tracks the BofA Merrill Lynch Long Treasury Principal STRIPS Index, which is comprised of long-term Treasurys whose coupon cash flows have been removed, leaving only the final principal as payment. They are sold at a steep discount to their face value. ZROZ is composed of these effectively zero-coupon bonds known as STRIPS, but only ones with at least 25 years to maturity. The fund is very sensitive to interest rate changes, performing well when interest rates fall but struggling when interest rates start to climb.
- Performance over 1-Year: 13.9%
- Expense Ratio: 0.07%
- Annual Dividend Yield: 2.83%
- 3-Month Average Daily Volume: 241,514
- Assets Under Management: $1.8 billion
- Inception Date: December 6, 2007
- Issuer: Vanguard
EDV also offers exposure to long-dated Treasurys in the form of STRIPS. The fund tracks the Barclays Capital U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index, which gauges the return of STRIPS with maturities ranging from 20 to 30 years. This ETF can be an attractive source of return for investors who believe that rates will either hold steady or decline. EDV also has a low expense ratio compared to many government bond ETFs.
- Performance over 1-Year: 11.4%
- Expense Ratio: 0.15%
- Annual Dividend Yield: 1.69%
- 3-Month Average Daily Volume: 10,100,718
- Assets Under Management: $17.9 billion
- Inception Date: July 26, 2002
- Issuer: iShares
TLT, like the two ETFs above, also offers exposure to long-dated Treasurys. The fund tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index, which measures the performance of Treasurys with a remaining maturity of at least 20 years. TLT is a good option for investors seeking to extend the duration of their portfolio and possibly enhance its return. It is also relatively cost efficient and highly liquid compared to many similar ETFs, allowing investors the ability to execute trades quickly.