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Best U.S. Treasury ETFs (Updated September 2022)

There are a lot of great ultra-cheap options in this space for investors.

For anyone who's banked on Treasuries to help protect their portfolio from the bear market in equities this year, they've probably been mighty disappointed. We haven't seen an inflationary environment like this since the 1970s and that's completely broken the traditional relationship between stocks and bonds. Treasuries should be inversely correlated to stocks in most normal circumstances. Instead, we've seen the S&P 500 and long-term Treasuries both decline by more than 20% at the same time. That's left investors with precious few places to seek safety.

The damage has taken place all along the yield curve. To give a sense of how unusual this environment has been, the iShares 1-3 Year Treasury Bond ETF (SHY) experienced a maximum loss of 2% over its lifetime prior to this year and that was during the financial crisis. In 2022, it fell nearly 5% from peak to valley. The iShares 20+ Year Treasury Bond ETF (TLT) fell as much as 24% during the financial crisis, but was down as much as 34% earlier this year. There has never truly been a Treasury market quite like the one we're in right now.

Regardless of the current environment, there are a lot of strong Treasury ETFs to choose from. More than half of the nearly 50 non-TIPS Treasury ETFs available come with an expense ratio of less than 0.10%. A lot of them are also more than large enough to avoid any potential issues with trading costs being too high. That means that choosing which Treasury ETF is right 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.

U.S. Treasuries

U.S. Treasuries

Unlike the equity ETF market, which has a lot more diversity, the Treasury ETF market is dominated by the major issuers - Vanguard, State Street, BlackRock and Schwab. Out of the top 30 ETFs on these rankings, just four come from issuers outside of the heavyweights. This is one of those areas of the ETF market that I don't think is harmed by a lack of issuer diversity because Treasury investing is not as nuanced as investing in different themes or strategies within equities. Investors are getting broad, ultra-low cost coverage and that's a good thing.

Ranking The U.S. Treasury ETFs

The variety of ETF choices makes distinguishing the best from the rest a little challenging. You've probably heard most financial pundits talk about focusing on funds with low expense ratios. That can certainly be a big factor in deciding which ETF to go with (it's probably the most important factor, in my view), but there are a lot of things that could go into making the right choice.

That's where I'm going to try to make things easier for you. Using a methodology that I've developed, which takes into account many of the factors that should be considered and weighting them according to their perceived level of importance, we can rank the universe of available ETFs in order to help identify the best of the best for your portfolio.

Now, this certainly won't be a perfect ranking. The data, of course, will be objective, but judging what's more important is very subjective. I'm simply going off of my years of experience in the ETF space in helping investors craft smart, cost-efficient portfolios.

Methodology And Factors For Ranking ETFs

Before we dive in, let's establish a few ground rules.

First, all of the data is used is coming from ETF Action. They have gone through the ETF universe to identify and categorize those ETFs used here. There are many that qualify and we'll be using their categorization as a starting point. Many thanks to them for opening up their vast database for my use.

Second, let's run down the factors I used in the ranking methodology.

  • Expense Ratio - This is perhaps the most important factor since it's the one thing investors can control. If you choose a fund that charges 0.1% annually over a fund that charges 1%, you're automatically coming out ahead by 0.9% annually. You can't control what a fund returns, but you can control what you pay for the portfolio. Lower expense ratios equal more money in your pocket.
  • Spreads - This relates to how cheaply you can buy and sell shares. Generally speaking, the larger the fund, the lower the spreads. Bigger funds usually have many buyers and sellers. Therefore, it's easier to find shares to transact and that makes them cheaper to trade. On the other hand, small funds tend to trade fewer shares and investors often need to pay a premium to buy and sell. Considering expense ratios and spreads together usually give you a better idea of the total cost of ownership.
  • Diversification - Generally speaking, the broader a portfolio is, the better chance it has at reducing overall risk. A fund, such as the Energy Select Sector SPDR ETF (XLE), provides a good example. 45% of the fund's total assets go to just two stocks - ExxonMobil and Chevron. By buying XLE, you're putting a lot of faith in just those two companies. An equal-weighted fund, such as the Invesco S&P 500 Equal Weight Energy ETF (RYE), would score higher on diversification than XLE.
  • FactSet ETF Scores - FactSet calculates its own proprietary ETF ranking for efficiency, tradeability and fit. They basically are designed to tell us if an ETF is doing what it sets out to do. I'm not going to copy and paste that work that they're doing, but there is some influence there to make sure my rankings are on the right path.

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

One thing that is not considered is historical returns. Most ETFs are passively-managed and are simply trying to track an index, not outperform. ETFs shouldn't be penalized for low returns simply because the index they are tracking is out of favor at the moment.

I'm ranking ETFs based on more basic structural factors. Are they cheap to own? Are they liquid? Do they minimize trading costs? Do they maintain risk-reducing diversification benefits?

Being in the bottom half of the list doesn't automatically make a fund "bad". It simply means that due to a low asset base, a high expense ratio, a concentrated portfolio or some other factor, it poses additional costs or downside risks.

Best U.S. Treasury ETFs

While it's easy to assume that in a battle of low cost you'll find a Vanguard or iShares name at the top of the list. It's actually Schwab that owns not just the #1 fund in these rankings but the #2 fund as well.

Best U.S. Treasury ETFs

Best U.S. Treasury ETFs

The Schwab Short-Term U.S. Treasury ETF (SCHO) and the Schwab Intermediate-Term U.S. Treasury ETF (SCHR) take the top two spots based on their 0.03% expense ratios and large asset bases. In all honestly, there's very little to distinguish the top 7 funds on this list. All have multi-billions of dollars invested in them and have expense ratios of 6 basis points or less. That could have been a bigger point of contention a year ago when yields were still next to nothing and every basis point mattered. Today, the iShares Short Treasury Bond ETF (SHV), which targets bonds with a remaining maturity of less than one year, has a yield of nearly 2.5%. Those 2-3 basis points are much less consequential now.

In a bit of a surprise, the BlackRock 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) - don't score relatively well. They are all still worthwhile ETFs to consider, but the 0.15% expense ratios don't hold up well when there are so many cheaper options. The comparatively newer iShares 0-3 Month Treasury Bond ETF (SGOV) and the iShares U.S. Treasury Bond ETF (GOVT), which invests in the entire government bond market are among the highest-rated iShares ETFs on the list since they come in at a more competitive 0.05%. Still, SGOV is BlackRock's highest entry on this list way down at #9.

As far as the other two big issuers are concerned, State Street lands its big trio - the SPDR Short-Term Treasury ETF (SPTS), the SPDR Intermediate-Term Treasury ETF (SPTI) and the SPDR Long-Term Treasury ETF (SPTL) - all land in the top 7. State Street's Treasury ETF lineup is actually fairly 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 those three. BIL, for the record, is one of my favorite cash alternative ETFs available.

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

Among the other Treasury ETFs on this list...

Best U.S. Treasury ETFs

Best U.S. Treasury ETFs

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

The Global X Interest Rate Hedge ETF (IRHG) invests in a combination of interest rate swap options and short-term Treasuries for liquidity purposes. It's designed to increase in value when interest rates rise and is up 8% on the year so far.

The KraneShares Quadratic Deflation ETF (BNDD) in another unique offering that invests mostly in long-term Treasuries, but adds on long options in the shape of the interest rate curve. This latter part of the strategy could benefit during a flattening yield curve scenario that is typically indicative of recessionary or deflationary pressures.

If you're looking for a real home run swing in Treasuries, you'll want to take a look at the PIMCO 25+ Year Zero Coupon U.S. 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 in the event that rates fall again, but year-to-date returns demonstrate how risky they can be.

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