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 Aug. 9, 2021, the 10-year Treasury yield was 1.33%, while it was 0.59% on Aug. 10, 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.
- Treasurys have significantly underperformed the broader market over the past year.
- The Treasury exchange-traded funds (ETFs) with the best one-year trailing total returns are IVOL, TDTF, and TIPX.
- The top holding of the first of these ETFs is shares of the Schwab U.S. TIPS ETF, and the top holdings of the other two are U.S. Treasury notes.
There are 43 distinct U.S. Treasury ETFs that trade in the United States, 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 (TIPS ETFs).
Treasurys, as measured by the Bloomberg Barclays U.S. Treasury Bond Index, have significantly underperformed the broader market, providing a total return of -3.4% over the past 12 months compared to the S&P 500’s total return of 34.5%, as of Aug. 6, 2021. The best Treasury ETF, based on performance over the past year, is the Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL).
We examine the three best Treasury ETFs below. All numbers are as of Aug. 9, 2021.
- Performance Over One-Year: 6.7%
- Expense Ratio: 0.99%
- Annual Dividend Yield: 3.60%
- Three-Month Average Daily Volume: 1,735,915
- Assets Under Management: $3.2 billion
- Inception Date: May 13, 2019
- Issuer: China International Capital Corp. (CICC)
IVOL is designed to hedge against interest rate volatility, a steepening yield curve, and inflation. It seeks to protect investors against 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 to achieve its investment objectives.
- Performance Over One-Year: 6.3%
- Expense Ratio: 0.18%
- Annual Dividend Yield: 3.23%
- Three-Month Average Daily Volume: 112,622
- Assets Under Management: $665.1 million
- Inception Date: Sept. 19, 2011
- Issuer: Northern Trust
TDTF tracks the iBoxx 5-Year Target Duration TIPS Index, which is designed to measure the performance of short-term TIPS. 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.
TDTF can be used either in 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 two different sets of U.S. Treasury notes and a set of U.S. Treasury bonds.
- Performance Over One-Year: 6.1%
- Expense Ratio: 0.15%
- Annual Dividend Yield: 3.44%
- Three-Month Average Daily Volume: 329,662
- Assets Under Management: $847.9 million
- Inception Date: May 29, 2013
- Issuer: State Street Global Advisors
TIPX tracks the Bloomberg Barclays 1–10 Year U.S. Government Inflation-Linked Bond Index, which gauges the performance of TIPS that have a remaining maturity greater than or equal to one year and less than 10 years. The ETF seeks to hedge against inflation by investing in TIPS with maturities matching those of its index.
About one-third of TIPX’s holdings have maturities in the three- to five-year range. Its top three holdings are three different sets of U.S. Treasury notes.
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