BIL, SHV: Guaranteed Zero Returns

August 22, 2011

Investors are pouring money into ETFs that, at best, will earn nothing. There are other options.

ETF investors, roiled by the market, have been piling into the safest of safe Treasury funds recently. In the last month, $1.1 billion has flowed into the SPDRS Barclays Capital 1-3 Month T-Bill ETF (NYSEArca: BIL) and $600.5 million into the iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca: SHY), while $121.3 million flowed out of the iShares Short Treasury Bond Fund (NYSEArca: SHV), which invests in Treasurys maturing in 12 months or less.

Together, these funds have over $15 billion in assets under management.

I don’t understand why.

I understand that investors are looking for safety in very uncertain market conditions, but using BIL or SHV as a safe haven is the equivalent of still paying your bank to have a checking account. Sure, some people still do it, but plenty of better alternative options exist.First, the numbers. Short-term Treasury yields have been at or near zero for some time. The Federal Reserve says they will stay that way at least through the middle of 2013. That translates into near-zero returns on funds like BIL and SHV. In fact, as it stands currently, the dividend yield on BIL is zero. Zip. Zilch. Nada.

If demand for short-term Treasurys continues, investors will be, at best, standing still in these funds. When you account for trading costs and spreads, investors are likely paying for the privilege to hold Treasurys. In this case, individual investors would be better off holding their money in FDIC-insured savings accounts.

Investors who wish to park on the sidelines sums exceeding the FDIC insurable limit still have a number of options.

Inflation concerns appear to have been reignited by the reported increase in CPI. The concern is that a spike in inflation will push nominal interest rates—a real and reasonable concern that has many investors avoiding longer maturities. There are, however, two Treasury inflation-protected securities (TIPS) funds that may alleviate those concerns.

The Pimco 1-5 Year U.S TIPS Index Fund (NYSEArca: STPZ) and the iShares Barclays 0-5 Year TIPS Bond Fund (NYSEArca: STIP) both provide inflation-protected exposure for investors. Although both funds reach much further down the maturity spectrum than BIL or SHV, the additional yield compensates investors for adverse movements in interest rates, especially if they are expected to come from inflation.

Because STIP includes TIPS maturing in less than a year, it has almost half the duration of STPZ. As such, it has lower interest rate sensitivity.

 

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