Fixed Income: U.S. Government Treasury Intermediate
The best intermediate Treasury fund for you depends on your definition of “intermediate.” Each of the six funds in this segment defines it differently, making it likely that at
“The best fund for you depends on your definition of "intermediate."” least one of them fits your needs. The broadest fund, ITE, holds Treasuries with 1-10 years remaining until maturity. The next broadest, SCHR, cuts out the shorter-term securities to only hold Treasuries that will mature in the next 3-10 years. IEF goes even further, limiting its portfolio to bonds expiring in 5-10 years. In contrast, IEI and FIVZ each cut out the shortest- and longest-term bonds to focus mostly on those maturing in the next 3-7 years. The last fund, TENZ, goes outside the realm of our 1-10-year benchmark with a portfolio of Treasuries with 7-15 years remaining. ITE matches the market best in our view, and is our Analyst Pick for the segment. Meanwhile, IEI’s stellar Efficiency and Tradability, combined with its decent Fit, earns it a spot on our Opportunities List.
The six funds all charge similar expense ratios, ranging from 10 to 15 bps. However, tracking and trading costs are better indicators of all-in costs in this segment. Most of the funds track their underlying indexes very closely. Trading differences are similarly severe. IEF and IEI lead the segment with multiple millions of dollars trading most days at very narrow spreads. ITE and SCHR are less liquid, but can also be traded with relative ease. TENZ and FIVZ, however, trade less than $1M on most days. (Insight updated 01/16/17)
ETF.com Efficiency Insight
The funds in this segment are, for the most part, very similar in terms of Efficiency. SCHR charges the lowest expense ratio—10 bps—but even the most “expensive”
“ The funds in this segment are very similar in terms of Efficiency” ETFs here charge just 15 bps. Most funds also track their underlying indexes well, with median tracking differences close to their expense ratios and narrow ranges. TENZ and FIVZ have, however, some downside drag in tracking their indexes, trailing their respective indexes by more than twice its stated expense ratio over some particularly bad 12-month stretch.
Most of the funds in this segment are stable. IEF and IEI are the most popular, with billions of dollars in AUM each, followed by SCHR and ITE, which have over $200M and $150M, respectively. FIVZ, however, haven’t attracted much investor interest, hence we see high risk of closure. (Insight updated 01/16/17)
ETF.com Tradability Insight
IEF dominates the segment in Tradability, with the higheset dollar volume changing hands at super tight spreads compared to its peers. Its cousin, IEI, also tends to trade at similarly
“IEF dominates the segment in Tradability” tight spreads, but IEI’s mediocre median daily volume leaves less space for large trades. That said, retail investors should be able to get in and out of both funds cheaply and easily.
The remaining funds trade much less frequently than IEF and IEI. SCHR and ITE have the healthiest volumes and manageable spreads. Unfortunately, TENZ and FIVZ trade only less than $500K on most days—volumes that make filling large orders difficult. Still, cost-effective retail transactions are possible with limit orders and some effort. (Insight updated 01/16/17)
ETF.com Fit Insight
The six intermediate-term Treasury ETFs all define “intermediate” maturity differently. As a result, they all hold very different portfolios. ITE holds the broadest portfolio,
“The 6 ETFs all define "intermediate" maturity differently” with bonds expiring in the next 1-10 years. In contrast, SCHR holds a smaller slice of the intermediate market, with Treasurys that mature in 3-10 years. IEF only holds longer-term intermediate Treasuries, limiting its portfolio to bonds mostly expiring in the next 7-10 years. TENZ tilts even further toward the long end of the curve, with bonds that mature in 7-15 years. The last funds, IEI and FIVZ mostly hold the middle bonds—those maturing in 3-7 years.
The resulting tilts are consistent with the funds’ maturities. TENZ and IEF offer the highest yields, along with the longest average maturities and effective durations. At the other end of the spectrum, ITE has the lowest yield with less than 1/2 of portfolio maturity of TENZ and IEF. IEI, FIVZ and SCHR are in the middle of the spectrum, with yields that move up in accordance with their longer maturities and durations.
Overall, the choice here boils down to your definition of intermediate maturity. ITE matches the market best in our view, but the variety of maturity ranges in this space attests to the lack of a clear standard. The range of total return results shows how much the decision matters. (Insight updated 01/16/17)