For anyone who bet on Treasuries to help protect their portfolios from the bear market in equities this year, they were probably very disappointed. We haven’t seen an inflationary environment like this since the 1970s and it completely breaks the traditional relationship between stocks and bonds. Treasuries should be inversely correlated to stocks under most normal circumstances. Instead, we’ve seen the S&P 500 and long-term Treasuries drop more than 20% at the same time. This leaves investors with few valuable places to seek safety.

The damage occurred all along the yield curve. To give an idea of ​​the originality of this environment, the iShares 1-3 Year Treasury Bond ETF (SHY) had a maximum loss of 2% in its lifetime before this year and that was during the financial crisis. In 2022, it has fallen nearly 5% from peak to peak. The iShares 20+ Year Treasury Bond ETF (TLT) fell 24% during the financial crisis, but fell 34% earlier this year. There has never really been a Treasury market like the one we find ourselves in now.

Regardless of the current environment, there are plenty of strong Treasury ETFs to choose from. More than half of the nearly 50 non-TIPS Treasury ETFs available have an expense ratio below 0.10%. Many of them are also more than big enough to avoid any potential issues with too high transaction costs. This means that choosing the right Treasury ETF for you really comes down to whether you want the relative safety of short-term notes, the capital appreciation potential of long-term bonds, or something in between.

US Treasuries

Unlike the equity ETF market, which has much more diversity, the Treasury ETF market is dominated by the major issuers – Vanguard, State Street, BlackRock and Schwab. Of the top 30 ETFs in this ranking, only four are from non-heavyweight issuers. It’s one of those areas of the ETF market that I don’t think suffers from a lack of issuer diversity because investing in Treasuries isn’t as nuanced as investing in different themes or strategies within the actions. Investors get broad coverage at very low cost and that’s a good thing.

Ranking of US Treasury ETFs

The variety of ETF choices makes it difficult to distinguish between the best and the bad. You’ve probably heard most financial experts talk about focusing on funds with low expense ratios. This can certainly be a big factor in deciding which ETF to choose (it’s probably the most important factor, in my opinion), but there are a lot of things that could go into making the right choice.

This is where I will try to make it easier for you. Using a methodology that I have developed, which takes into account many factors that need to be considered and weights them according to their perceived level of importance, we can rank the universe of ETFs available in order to help identify the best of the best for your wallet.

Now, that definitely won’t be a perfect ranking. The data, of course, will be objective, but judging what is most important is very subjective. I simply take advantage of my years of experience in the field of ETFs to help investors create smart and profitable portfolios.

ETF methodology and ranking factors

Before we dive in, let’s establish some ground rules.

First of all, all the data used comes from ETF shares. They scoured the ETF universe to identify and categorize the ETFs used here. There are many who qualify and we will use their categorization as a starting point. Many thanks to them for opening up their vast database for my use.

Second, let’s review the factors I used in the ranking methodology.

  • Expense ratio – This is perhaps the most important factor since it is the only thing investors can control. If you choose a fund that charges 0.1% per year rather than one that charges 1%, you automatically earn 0.9% per year. You can’t control how a fund performs, but you can control what you pay for the portfolio. Lower expense ratios equals more money in your pocket.
  • Spreads – This is about how you can buy and sell stocks cheaply. Generally, the larger the fund, the smaller the spreads. Larger funds usually have many buyers and sellers. Therefore, it is easier to find stocks to trade and it makes them cheaper to trade. On the other hand, smaller funds tend to trade fewer stocks and investors often have to pay a premium to buy and sell. Looking at expense ratios and variances together usually gives you a better idea of ​​total cost of ownership.
  • Diversification – In general, the larger a portfolio, the more likely it is to reduce overall risk. A fund, such as the SPDR Energy Select Sector ETF (XLE), is a good example. 45% of the fund’s total assets go to just two stocks – ExxonMobil and Chevron. By purchasing XLE, you place great trust in these two companies. An equally weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), would score a higher diversification score than XLE.
  • ETF FactSet Scores – FactSet calculates its own proprietary ETF ranking for efficiency, tradability and fit. They are basically designed to tell us if an ETF is doing what it intended to do. I’m not going to copy and paste this work they do, but there is some influence there to make sure my rankings are on track.

There are a few other minor factors thrown into the mix, but these are the main factors considered.

One thing that is not taken into account is historical returns. Most ETFs are passively managed and simply try to track an index, not outperform. ETFs shouldn’t be penalized for low returns just because the index they track is out of fashion right now.

I rank ETFs based on more fundamental structural factors. Are they cheap to own? Are they liquid? Do they minimize transaction costs? Do they retain the benefits of risk-reducing diversification?

Being in the bottom half of the list does not automatically make a fund “bad”. It simply means that due to a low asset base, high expense ratio, concentrated portfolio, or some other factor, there are additional costs or downside risks.

Best US Treasury ETFs

Although it’s easy to assume that in a low cost battle you’ll find a Vanguard or iShares name at the top of the list. It is in fact Schwab which not only holds the n°1 fund in this ranking, but also the n°2 fund.

Best US Treasury ETFs

Best US Treasury ETFs

The Short Term US Treasury Schwab ETF (SCHO) and the Mid-Term US Treasury Schwab ETF (SCHR) take the top two spots due to their 0.03% expense ratios and large asset bases. In all honesty, there is very little to distinguish the top 7 funds on this list. All have invested several billion dollars and have expense ratios of 6 basis points or less. This might have been a bigger point of contention a year ago, when yields were still close to nothing and every basis point mattered. Today the iShares Short Treasury Bond ETF (SHV), which targets bonds with a residual maturity of less than one year, posted a yield of almost 2.5%. Those 2-3 basis points are much less substantial now.

In a small surprise, BlackRock’s suite of original Treasury ETFs – SHV, the iShares 1-3 Year Treasury Bond ETF (SHY)the iShares 3-7 Year Treasury Bond ETF (IEI)the iShares 7-10 Year Treasury Bond ETF (IEF)the iShares 10-20 Year Treasury Bond ETF (TLH) and the iShares 20+ Year Treasury Bond ETF (TLT) – does not score relatively well. These are all great ETFs to consider, but 0.15% expense ratios don’t hold up well when there are so many cheaper options. The relatively newer iShares 0-3 Month Treasury Bond ETF (SGOV) and the iShares US Treasury Bond ETF (GOVT), which invests in the broader government bond market, are among the highest-rated iShares ETFs on the list, as they are at a more competitive rate of 0.05%. Still, SGOV is BlackRock’s highest entry on this list at #9.

As for the other two major transmitters, State Street lands its big trio – the SPDR Short Term Cash ETF (SPTS)the Mid-Term Treasury SPDR ETF (SPTI) and the SPDR Long-Term Cash ETF (SPTL) – all land in the top 7. State Street’s range of Treasury ETFs is actually quite limited with only the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the SPDR Bloomberg 3-12 Month T-Bill ETF (BILS) existing in addition to these three. BIL, for the record, is one of my favorite alternative cash ETFs available.

The only two Vanguard ETFs with more than $10 billion – the Vanguard Short Term Cash ETF (VGSH) and the Vanguard Intermediate Term Cash ETF (VGIT) – occupy #3 and #4.

Of the other Treasury ETFs on this list…

Best US Treasury ETFs

Best US Treasury ETFs

It seems a little unfair to include the last four ETFs on this list as they are not pure Treasury ETFs like the others. The Innovator 20+ Year Treasury Bond ETF 5 Floor – July (TFJL) and the Innovator 20+ Year Treasury Bond 9 Buffer ETF – July (TBJL) bring the popular buffer style of ETFs to the world of Treasuries. The cost of layering and managing protection comes at an understandable cost, but I can see these products catching on eventually.

The Global X Interest Rate Hedging ETF (IRHG) invests in a combination of interest rate swap options and short-term treasury bills for liquidity purposes. It is designed to increase in value when interest rates rise and has risen 8% year-to-date.

The KraneShares Quadratic Deflation ETF (BNDD) in another unique offering that invests primarily in long-term Treasury bills, but adds long options in the form of the yield curve. This last part of the strategy could benefit from a flattening yield curve scenario which is usually indicative of recessionary or deflationary pressures.

If you’re looking for a real home run in Treasuries, you’ll want to check out the PIMCO 25+ Year Zero Coupon US Treasury Index ETF (ZROZ) or the iShares 25+ Year Treasury STRIPS Bond ETF (GOVZ). Both carry very high duration risk and would likely be the biggest beneficiaries should rates fall again, but year-to-date returns show just how risky they can be.

Read more…

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