Fixed Income: U.S. Government Treasury
The two ETFs covering the broad US Treasury universe are markedly different from each other, so investors will need to weigh their different strategies carefully. Those wanting balanced,
“PLW is heavily skewed toward the longer end of the yield curve, ” comprehensive exposure to the US Treasury space should look no further than GOVT. The fund, which tracks the same index as our benchmark, has very minimal differences in its weighted average maturity, effective duration and yield to maturity. GOVT is also one of the cheapest funds in the segment (0.15% expense ratio), which has helped it amass assets and generate ample liquidity for retail and institutions alike. GOVT is easily our Analyst Pick for the segment.
Meanwhile, PLW is heavily skewed toward the longer end of the yield curve, with almost 70% allocated to 10+ year maturities. This is caused by the fund’s unique laddered methodology, which equal-weights 30 securities across various maturities. While this skew gives PLW the highest yield to maturity in the segment, it also doubles the fund’s effective duration, and quadruples its 10-year key rate duration, compared with the benchmark. Investors most concerned about interest rate risk should stay away. (Insight updated 11/22/17)
ETF.com Efficiency Insight
Both funds in the segment are very Efficient. However, GOVT holds the edge in Efficiency due to its tracking performance. The fund has been successful in asset gathering since its February
“GOVT holds the edge in Efficiency” 2012 launch. Its low 0.15% expense ratio puts GOVT as the lowest in the segment. GOVT’s low expense ratio, combined with iShares’ securities-lending program, helps the fund track its index extremely well, thereby actually delivering the value of its low fee.
PLW is the older of the two, with over 6 years’ trading history. It’s also well-established, with AUM over $350M. PLW is also tax efficient—to date, it hasn’t paid out on any capital gains distributions. However, Still, PLW comes with the highest holding expense ratio in the segment, charging 0.25%. (Insight updated 11/22/17)
ETF.com Tradability Insight
If retail liquidity is your concern, GOVT is your only real option despite not being an ideal option. For institutions both funds can be traded with ease thanks to the deep liquidity
“GOVT is the only real option for retail investors” of the Treasury market. Multiple creations/redemptions can be easily absorbed without adverse price impact on underlying securities. (Insight updated 11/22/17)
ETF.com Fit Insight
[Insight as of 11/28/14] GOVT provides representative coverage of the market, market-value weighted exposure across different maturities within the US Treasury universe. Its high Fit score
“GOVT provides a representative coverage of the market” is certainly helped by GOVT tracking the same index as our benchmark. However, GOVT still heavily optimizes its portfolio, only holding roughly 1/4 of the securities in the benchmark, which creates slight tilt differences. However, these tilt differences cause little effect in the fund’s effective duration, yield-to-maturity and weighted average maturity.
PLW, meanwhile, is a poor Fit to our benchmark, mainly due to its heavy skew toward longer bonds caused by its laddered methodology that equal-weights 30 securities with different maturities. PLW is therefore heavily concentrated on the far end of the yield curve, with almost 70% of the fund weighted in Treasurys with 10 years remaining in maturities. While PLW’s yield to maturity is close to double the benchmark. It also significantly increases the fund’s interest rate risk. PLW is not the fund for investors wanting less interest rate risk. (Insight updated 11/22/17)