Finding the Best Short-Term Treasury Bond ETFs: Comparison of Top Picks

Introduction

Investors seeking a safe haven for their money often turn to short-term Treasury bonds, especially during times of market volatility. With their minimal risk and reliable returns, short-term Treasury bond ETFs have become a popular choice for those looking to preserve capital while earning modest yields.

In addition, a short-term Treasury bond ETF is often a key component of an investment portfolio. With several options available, how do you determine which one is the best fit for your needs?

In this post, we will compare five of the most popular short-term Treasury bond ETFs: BIL, SHV, SHY, VGSH, and SPTS. These ETFs focus on U.S. government bonds with maturities ranging from a few months to three years, offering stability and liquidity, albeit with slightly different risk and return profiles.

We’ll break down each of these ETFs based on essential factors such as asset size, average daily trading volume, performance, and total expense ratios. By the end of this comparison, you'll have a clear understanding of which ETF may align best with your investment goals, whether you're focused on minimizing costs or maximizing liquidity.

Underlying Holdings: Maturities

When comparing the underlying holdings of the five selected short-term Treasury bond ETFs, they can be divided into two distinct categories based on their average effective maturity. BIL (SPDR Bloomberg 1-3 Month T-Bill ETF) and  SHV (iShares Short Treasury Bond ETF) fall into the very short-term category, with average effective maturities less than 0.3 year.

These ETFs focus on Treasury bills with maturities ranging from a few weeks to just under 12 months, making them ideal for investors seeking maximum liquidity and minimal interest rate risk. Their holdings provide safety and stability, though at the expense of lower yields in a normal positive yield-curve environments. We'll refer to them as Ultra Short-Term UST bond ETFs as a group for convenience.

On the other hand, SHY (iShares 1-3 Year Treasury Bond ETF), VGSH (Vanguard Short-Term Treasury ETF), and SPTS (SPDR Portfolio Short Term Treasury ETF) have slightly longer average effective maturities, ranging from 1 to 3 years.

These ETFs invest in U.S. Treasury bonds with maturities that extend up to two or three years, offering a balance between higher yields and moderate exposure to interest rate fluctuations. Investors looking for a bit more income without sacrificing the safety of government-backed securities often find these options appealing. We'll refer to them as Short-Term UST bond ETFs as a group for convenience.

Now, let's take a look at comparison table of the five best ETF candidates.

Best ETF Candidates

AUM = Assets Under Management; ADTV = Average Daily Trading Volume (# of shares);
A/R = Annualized Return over the latest 12 months; T/R = Total Return over the latest 12 months including yield; TER = Total Expense Ratio; all data as of October 11, 2024

We selected the 5 best ETF candidates that track the short-term U.S. Treasury bond index and compared them across 5 key parameters: (1) AUM: the larger, the better (more reliable), (2) ADTV: the higher, the better (more liquid), (3) T/R: the higher, the better (ETFs tracking the same index should have same returns, but sometimes non-trivial discrepancies arise), and (4) TER: the lower, the better (less costly). we’ve highlighted the best performer in each category in green and the worst in orange to help you quickly identify the differences.

Comparison

• Assets under Management: For Ultra Short-Term UST  bond ETFs category, BIL (SPDR Bloomberg 1-3 Month T-Bill ETF) has almost twice AUM than SHV (iShares Short Treasury Bond ETF). For Short-Term UST bond ETFs category, SHY (iShares 1-3 Year Treasury Bond ETF) and VGSH (Vanguard Short-Term Treasury ETF) have similar AUMs while SPTS (SPDR Portfolio Short Term Treasury ETF) has significantly smaller assets.

• Daily Trading Volume: BIL and SHY have the largest average daily trading volume in their respective categories. Notably, SPTS has a comparatively low average daily trading volume within the Short-Term UST bond ETFs category, especially considering its share price of $29.20, which is approximately one-third of SHY's $82.50 as of October 10, 2024.

• Total Returns: Total returns are calculated as the sum of the 12-month annual returns (share price change) and the 12-month yield (trailing 12-month interest and dividend payments, as provided by Morningstar). In the Ultra Short-Term UST bond ETFs category, both BIL and SHV report the same total returns of 5.20%. In the Short-Term UST bond ETFs category, SPTS has the best returns at 5.91%, while SHY shows relatively weaker performance at 5.66%. VGSH falls in the middle with returns of 5.84%.

• Expense Ratio: In the Ultra Short-Term UST bond ETFs category, BIL has a marginally better expense ratio compared to SHV. For the Short-Term UST bond ETFs category, SPTS boasts the lowest expense ratio at 0.03%, while SHY has the highest at 0.15%. VGSH sits in the middle with an expense ratio of 0.04%.

Conclusion

To choose the best short-term Treasury bond ETF for your portfolio, it’s crucial to first understand the difference between Ultra Short-Term and Short-Term categories. Ultra Short-Term UST bond ETFs, with their shorter maturities, provide higher liquidity and minimal interest rate risk but often come with lower yields in a normal upward-sloping yield curve environment. On the other hand, Short-Term  UST bond ETFs offer slightly higher yields, but with a moderate increase in duration risk. Deciding between these two depends on your preference.

In the Ultra Short-Term category, BIL stands out for its large assets, high liquidity, and low expense ratio, making it ideal for investors focused on safety and flexibility. For the Short-Term category, VGSH is a strong choice due to its balance of reasonable expense ratio, returns, asset size, and liquidity.

Short-Term U.S. Treasury bond ETF is often an essential component of a well-rounded investment portfolio. Depending on your priorities, you may choose different ETFs. However, it's better to be cautious of ETFs with less than $10 billion in assets under management, as they may lack liquidity compared to larger, more established options. 

Thanks for reading. I wish you success in making smart investments!

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