Why Invest in Treasury ETFs? Everything to Know

With Treasury yields at their highest in 16 years, is it time to invest in the U.S. bond market?

kent
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Research Lead
Reviewed by: etf.com Staff
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Edited by: Mark Nacinovich

Inflation, rising interest rates and higher yields have investors looking more closely at Treasury securities. Many investors are attracted to the combination of relative safety and high yields of short-term Treasury ETFs. Other investors are buying long-term Treasury ETFs for a potential recession hedge, as yields would fall, and prices rise in a slowing economy.

While these benefits are attractive, there are still risks, such as interest rate risk and inflation risk, for investors to consider before investing.

What Is a Treasury ETF? 

A Treasury ETF is a type of exchange-traded fund that seeks to track a benchmark index of U.S. Treasury securities, which are debt instruments issued by the U.S. Department of the Treasury to raise funds for government operations and various projects. Treasuries are generally considered to be among the safest and most stable fixed-income investments because they are backed by the full faith and credit of the U.S. government.

Different Types of Treasury ETFs 

With many different types of Treasury ETFs to choose from, investors can use these bond funds for a range of investment objectives, including capital preservation, income generation, risk management, recession hedge or portfolio diversification.  

Common types of Treasury ETFs include: 

  • Broad market Treasury ETFs: These ETFs provide exposure to a wide range of U.S. Treasury securities, including Treasury bills (T-bills), Treasury notes (T-notes) and Treasury bonds (T-bonds). They offer a diversified portfolio of Treasury securities with varying maturities. 
  • Short-term Treasury ETFs: Short-term Treasury ETFs primarily invest in short-term Treasury securities, such as T-bills, which have maturities of one year or less. Ultra-short term Treasury ETFs cover maturities of three months or less. These ETFs are suitable for investors looking for a low-risk, highly liquid and short-term investment option. 
  • Intermediate-term Treasury ETFs: Intermediate-term Treasury ETFs focus on intermediate-term Treasury securities, such as T-notes, which have maturities ranging from two to 10 years. These ETFs can provide a balance between risk and return for investors with a moderate investment horizon. 
  • Long-term Treasury ETFs: Long-term Treasury ETFs concentrate on long-term Treasury securities, such as T-bonds, which have maturities typically exceeding 10 years. They are suitable for investors seeking exposure to the longer end of the yield curve and are willing to accept longer-duration risk. 
  • Inflation-protected Treasury ETFs: These ETFs primarily invest in Treasury Inflation-Protected Securities, or TIPS, which are designed to protect investors from inflation. TIPS offer a fixed interest rate plus an inflation-adjusted component linked to changes in the Consumer Price Index. Inflation-protected Treasury ETFs are designed to provide a hedge against rising inflation. 
  • Zero-coupon Treasury ETFs: Zero-coupon Treasury ETFs invest in zero-coupon Treasury bonds, which don’t pay periodic interest. Instead, they are sold at a discount to face value and pay the face value at maturity. These ETFs are useful for investors seeking specific target maturity dates. 
  • Treasury floating rate ETFs: These ETFs invest in floating-rate notes issued by the U.S. Treasury. The interest rate on these notes adjusts periodically based on changes in short-term interest rates, such as the Treasury's weekly auctions of 13-week T-bills. 
  • Treasury bond strips ETFs: Treasury bond strips, or "STRIPS" (Separate Trading of Registered Interest and Principal of Securities), represent the separate interest and principal components of Treasury bonds that have been "stripped" from the original bond. These ETFs offer investors exposure to Treasury STRIPS. 
  • Target maturity Treasury ETFs: Target maturity Treasury ETFs allow investors to target specific maturities by holding a portfolio of Treasury bonds that all mature in the same year. They provide a way to align investments with specific future financial goals and can enable investors to implement a bond laddering strategy. 

The Largest Treasury ETFs by Assets 

TickerFundAUMExpense Ratio
TLTiShares 20+ Year Treasury Bond ETF$38.06B0.15%
BILSPDR Bloomberg 1-3 Month T-Bill ETF$34.22B0.14%
IEFiShares 7-10 Year Treasury Bond ETF$26.65B0.15%
SHYiShares 1-3 Year Treasury Bond ETF$26.560.15%
GOVTiShares U.S. Treasury Bond ETF$23.340.05%

Data as of October 24, 2023.

The Pros and Cons of Investing in Treasury ETFs 

Investing in Treasury ETFs can have both advantages and disadvantages, depending on an investor’s goals, risk tolerance and overall financial strategy. Market and economic conditions are also factors for investors to consider. 

Here are the pros and cons of investing in Treasury ETFs: 

Pros

  • Safety: Treasury ETFs primarily invest in U.S. Treasury securities, which are considered among the safest investments in the world. They are backed by the full faith and credit of the U.S. government, which makes them low-risk assets. 
  • Diversification: Treasury ETFs often track an index of Treasury securities with various maturities. This diversification helps spread risk and provides options for investors with different investment horizons. 
  • Liquidity: Treasury ETFs are traded on stock exchanges, which means they are highly liquid. Investors can buy or sell shares during trading hours at prevailing market prices. 
  • Low cost: Treasury ETFs typically have low expense ratios, making them a cost-effective way to invest in government bonds. 
  • Ease of access: Treasury ETFs provide easy access to the Treasury bond market, which can be complex and costly to navigate when purchasing individual bonds. 
  • Interest income: Treasury ETFs pay interest income to investors, typically on a monthly or quarterly basis, depending on the specific ETF. This can provide a source of regular income for investors. 
  • Capital preservation: Treasury ETFs are often used by investors seeking to preserve capital or those who want a safe haven during market downturns. 

Cons

  • Low yields: Treasury ETFs generally offer lower yields compared with many other investment options, such as corporate bonds, dividend-paying stocks or real estate. This means they may not provide substantial income or returns. 
  • Interest rate risk: Treasury bond prices are inversely related to changes in interest rates. If market interest rates rise, as they did in 2022 and 2023, the market value of existing bonds may decrease, potentially resulting in a capital loss if you need to sell before maturity. 
  • Inflation risk: The fixed interest payments from Treasury bonds may not keep pace with inflation over time, meaning the real (inflation-adjusted) return may be lower. 
  • Opportunity cost: By investing in Treasury ETFs, you may miss out on the potential returns from riskier assets, such as equities, that can offer higher yields. 
  • Taxation: The interest income from Treasury ETFs is generally subject to federal income tax. Investors may also be subject to capital-gains tax if they sell shares at a profit. 

The Bottom Line on Treasury ETFs 

Treasury ETFs are suitable for investors looking for safety, liquidity and ease of access to the U.S. government bond market. They can be used as part of a diversified investment portfolio to achieve specific objectives, such as income generation and capital preservation.  

Because of their inflationary risk and interest rate risk, however, investors should carefully consider their individual financial goals and risk tolerance when incorporating Treasury ETFs into their investment strategy. They may be more appropriate for conservative investors or as a component of a broader asset allocation plan. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.