Treasury bonds are the best tool for downside protection and volatility reduction in a diversified investment portfolio. Here we’ll look at the best treasury bond ETFs.
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Contents
Introduction – Why Treasury Bonds?
The federal government issue bonds to investors to pay for operating costs in running the country. Because they’re guaranteed by the full faith and credit of the U.S. government, treasury bonds are considered to be the “safest” investment, and are thus popular among retirees and risk-averse investors. More importantly, treasury bonds offer the lowest correlation to stocks of any asset class, providing a superior diversification benefit compared to corporate bonds. Treasury bonds should be the first diversifier of choice alongside stocks.
Treasury bond behavior differs between different maturity lengths. Ultra-short-term treasury bonds with a maturity of less than 1 year are called “T Bills.” They are considered to be a “cash equivalent” because of their nearly nonexistent exposure to interest rate risk. This safety also comes with the lowest expected returns. On the flip side are “long bonds” with maturities greater than 20 years. In between those are “intermediate term” bonds with maturities of 5 years, 7 years, 10 years, etc. Various funds offer baskets of bonds of specific maturities.
Long-term bonds offer more risk with the potential for more reward, having the most exposure to interest rate risk. Longer-term bonds also tend to be less correlated to stocks than shorter-term bonds. As the names suggest, long-term bonds are more appropriate for investors with a long time horizon, and short-term bonds are more appropriate for retirees with a short-time horizon. I’m of the mind that bond duration should roughly match investing horizon, especially for those with an aggressive asset allocation that only allocates a small amount of the portfolio to bonds.
Below we’ll look at the best treasury bond ETFs.
The 11 Best Treasury Bond ETFs
Below are the 11 best treasury bond ETFs, sorted by shortest to longest duration.
BIL – SPDR Barclays 1-3 Month T-Bill ETF
The SPDR Barclays 1-3 Month T-Bill ETF (BIL) is the shortest-term T-Bill ETF available, and is thus the closest you can get to a true “cash equivalent.” The fund seeks to track the Barclays Capital U.S. 1-3 Month Treasury Bill Index, T-Bills with maturities between 1 month and 3 months. This ETF has a weighted average maturity of 1.08 months and an expense ratio of 0.14%.
SHV – iShares Short Treasury Bond ETF
Slightly longer than BIL above is the iShares Short Treasury Bond ETF (SHV), holding bonds with maturities of 1 year or less. Its average weighted maturity is 4.7 months. This ETF is one of the most popular for T-Bills, with over $20 billion in assets. The fund seeks to track the Barclays Capital U.S. Short Treasury Bond Index and has an expense ratio of 0.15%.
SHY – iShares 1-3 Year Treasury Bond ETF
The most popular treasury bond ETF out there is the iShares 1-3 Year Treasury Bond ETF (SHY), with over $21 billion in assets. This fund allows investors to access short-term treasury bonds via the Barclays Capital U.S. 1-3 Year Treasury Bond Index. This ETF has a weighted average maturity of 1.9 years and an expense ratio of 0.15%.
VGSH – Vanguard Short-Term Treasury ETF
A more affordable way to track the same index as SHY above is with the Vanguard Short-Term Treasury ETF (VGSH). It has an expense ratio of only 0.05%, and its weighted average maturity is slightly longer at 2.0 years. VGSH is less popular than SHY, with $13 billion in assets.
VGIT – Vanguard Intermediate-Term Treasury ETF
The Vanguard Intermediate-Term Treasury ETF (VGIT) is an affordable way to access intermediate-term treasury bonds. This ETF seeks to track the Bloomberg Barclays U.S. Treasury 3–10 Year Bond Index. This fund has a weighted average maturity of 5.7 years and an expense ratio of 0.05%.
IEF – iShares 7-10 Year Treasury Bond ETF
Still in the intermediate space but slightly longer than VGIT above is the iShares 7-10 Year Treasury Bond ETF (IEF), which seeks to track the ICE U.S. Treasury 7-10 Year Bond Index. The fund has a weighted average maturity of 8.4 years and an expense ratio of 0.15%
GOVT – iShares U.S. Treasury Bond ETF
Those seeking broader exposure – or those who don’t want to pick a bond maturity – may simply want to buy the entire U.S. treasury market, which can be done with the iShares U.S. Treasury Bond ETF (GOVT). The fund matches the weighted average maturity of the whole U.S. treasury bond market at 8.5 years. The fund tracks the ICE U.S. Treasury Core Bond Index, holding bonds with maturities between 1 year and 30 years. This ETF has over $14 billion in assets and an expense ratio of 0.05%.
TLH – iShares 10-20 Year Treasury Bond ETF
Investors seeking specific exposure to maturities between “intermediate” and “long” can use the iShares 10-20 Year Treasury Bond ETF (TLH). This fund is less popular than others on the list, with assets of only a little over $1 billion. The ETF seeks to track the ICE U.S. Treasury 10-20 Year Bond Index and has an expense ratio of 0.15%.
VGLT – Vanguard Long-Term Treasury ETF
The Vanguard Long-Term Treasury ETF (VGLT) is a popular, affordable way to access long-term treasury bonds. Bonds in this fund have a weighted average maturity of 25.1 years. The fund seeks to track the Bloomberg Barclays U.S. Long Treasury Bond Index and has an expense ratio of 0.05%.
TLT – iShares 20+ Year Treasury Bond ETF
Slightly longer than VGLT above is the iShares 20+ Year Treasury Bond ETF (TLT), with a weighted average maturity of 26.0 years. TLT can be considered more liquid than VGLT but has a higher expense ratio at 0.15%. The fund seeks to track the ICE U.S. Treasury 20+ Year Bond Index.
EDV – Vanguard Extended Duration Treasury ETF
STRIPS are long-dated treasury bonds with the coupon payment “stripped,” or removed. The fund seeks to track the Bloomberg Barclays U.S. Treasury STRIPS 20–30 Year Equal Par Bond Index and has a weighted average maturity of 25.3 years but also has an average duration – the measure of sensitivity to interest rate changes – of 24.6 years. EDV has an expense ratio of 0.07%.
Where To Buy These Treasury Bond ETFs
All the above treasury bond ETFs are available at M1 Finance. M1 has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, intuitive pie visualization, and a sleek, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here. Investors outside the U.S. can find these ETFs on eToro.
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Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
Hello John,
I have a question regarding what you mean by your bond maturity should match your investment horizon. Say my current investment horizon is 25 years from now and I select VGLT as a result. Does this mean I hold VGLT forever or should I adjust and begin to hold VGIT as that horizon approaches, then VGSH and so on? Thank you for putting up all this information! It is a valued resource for me.
Decrease duration as the horizon shortens, while increasing bond allocation.