Fixed Income: U.S. Government Treasury Short-Term
Three of the four ETFs in this segment offer marketlike exposure: the iShares 1-3 Year Treasury Bond Fund (SHY), Schwab Short-Term US Treasury ETF (SCHO) and PIMCO 1-3 Year US Treasury
“SHY is the stand out of the segment” Index ETF (TUZ). SHY, SCHO and TUZ interpret short-term debt to mean bonds due to mature in 1-3 years, fitting our definition of the market. In contrast, the SPDR Barclays Short-Term Treasury ETF (SST) looks different from the market. SST has a broader definition of short-term debt and invests about 1/3 of its portfolio in bonds maturing in 3+ years.
Still, the funds hit what they aim at with respect to coverage.
Every ETF in the segment earns high grades in Efficiency. They charge similarly low expense ratios (ranging from 8 to 15 bps), have excellent index tracking and low fund closure risk. The new kid on the block, SST, is the only exception to this rule, as it has failed to garner sufficient investor interest—its low AUM puts it at medium risk of closure.
Only SHY offers strong liquidity, with large dollar volumes on most days with tight spreads. SCHO and TUZ offer much smaller median daily volumes, but can be fairly traded with a bit of care.
Overall, SHY is the stand out of the segment, earning it our Analyst Pick. While retail investors can fairly access the space with SCHO and TUZ, institutions might want to take a look at SST, especially if one is searching for yield. (Insight updated 03/24/17)
ETF.com Efficiency Insight
Every fund in this segment earns high marks in Efficiency. Expense ratios are low across the board, ranging from 8 to 15 bps. Given the current low yielding environment and the short time
“SST is the exception with risk of fund closure” horizon of this space, every basis point counts. Tracking error can easily eat up the total return. Fortunately, every fund tracks its index tightly and with little variation, typically lagging their underlying indexes by only a few bps off their respective expense ratios.
The segment is generally popular with investors. The four funds manage a total of about $9B in assets, the majority of which is concentrated in SHY. SST is the exception: It launched more than two years ago and has failed to gain traction; its paltry asset base put it at medium risk of fund closure.
The funds have generally maintained tax efficiency too by either making very small cap gains payouts or avoiding them altogether. (Insight updated 03/24/17)
ETF.com Tradability Insight
SHY is the segment’s most liquid options, while SST, SCHO and TUZ fall behind.
SHY leads the pack, with a median daily volume north of over $100M and tight spreads, making it a
“SHY is the segment's most liquid options” great option for active traders. Institutions trading large share blocks can also expect tight spreads from liquidity providers.
Buy-and-hold investors can make do with SCHO and TUZ. Despite their thinner volumes—$5M for SCHO and $500K for TUZ—both show tight single-digit spreads. Small traders can get a fair price if limit orders are used.
SST is the bottom performer in liquidity in this segment due to a lack of asset and investor interest. It trades thinly and spreads are very wide which, depending on your time horizon, can significantly add to round-trip costs. (Insight updated 03/24/17)
ETF.com Fit Insight
SHY, SCHO and TUZ offer marketlike exposure to short-term Treasurys by tracking indexes that are very similar or identical to our benchmark. All three funds define “short term”
“Both SHY and SCHO track the same index as our benchmark.” as bonds due to mature between one and three years. On the other hand, SST reaches further out on the yield curve, investing in bonds due to mature in 1-5 years, for yield.
Both SHY and SCHO track the same index as our benchmark. Neither fund replicates its underlying index fully, resulting in minor differences from the benchmark. They nonetheless deliver highly comparable and excellent market coverage.
TUZ leans a bit toward the short end of the curve but arguably offers an even tighter focus than our benchmark.
By contrast, SST invests 1/3 of its portfolio in bonds due to mature in 3-5 years. As a result, the fund serves up the segment’s longest effective duration, which is compensated by the segment’s highest yield. (Insight updated 03/24/17)