Short-Term Treasury ETFs: A Guide for Investors
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Investors were surprised by first quarter Gross Domestic Product (GDP) growth coming in slower than expected. Meanwhile, inflation remains sticky, and the first rate cut from the Federal Reserve isn't expected until September.
In an uncertain and inflationary environment, the combination of high credit quality and low interest-rate sensitivity make short-term Treasury ETFs one of most popular securities on the market today.
Learn about the different types of Treasury ETFs on the short end of the yield curve and see yields and other key data on the largest Treasury ETFs in the short-term space.
What Is a Short-Term Treasury ETF?
A short-term Treasury ETF is an exchange-traded fund that tracks a basket of short-term Treasury securities, such as Treasury bills and notes. In the U.S., these debt instruments are issued by the Department of the Treasury to raise funds for government operations. They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.
Short-term Treasury ETFs specifically focus on Treasuries with shorter durations, which means these securities typically have maturities ranging from a few months to a few years. The objective of these ETFs is to provide investors with a low-risk, liquid and income-generating investment option. They are often used by investors who want to park their money in a safe and relatively liquid asset class for a short period while earning yields above typical money market accounts.
What Are the Different Types of Short-Term Treasury ETFs?
Short-term Treasury ETFs come in various forms, each catering to specific investment objectives or preferences. The main types include:
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Traditional short-term Treasury bond ETFs: These ETFs invest primarily in short-term U.S. Treasury bonds that typically have maturities ranging from one to three years. The largest in this group is the iShares 1-3 Year Treasury Bond ETF (SHY).
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Ultra-short-term Treasury ETFs: These ETFs focus on the very short end of the yield curve, with holdings that may include Treasury bills, or T-bills and other ultra-short term Treasury securities, which are generally those that have maturities of less than one year. The largest in this group is the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL).
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Short-term Treasury inflation-protected securities ETFs: Also known as short-term TIPS ETFs, these funds that track a basket of short-term Treasury inflation-protected securities, or TIPS, which are a type of government bond that is indexed to inflation. This means that the principal value of TIPS bonds increases as inflation rises and decreases as inflation falls. The largest short-term TIPS ETF is the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP).
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Active vs. Passive Treasury ETFs: Most short-term Treasury ETFs are passively managed, meaning they passively track a benchmark index. Some short-term Treasury ETFs are actively managed, meaning the fund managers are actively selecting and managing their holdings. Actively managed ETFs may have higher expense ratios but offer the potential for outperformance. An example is the Pimco Enhanced Short Maturity Active ETF (MINT).