A Guide to Treasury Bond ETFs

A Guide to Treasury Bond ETFs

With yields on Treasury bonds above 5%, Treasuries look particularly compelling.

Reviewed by: etf.com Staff
Edited by: Mark Nacinovich

A sleepy corner of the financial markets has suddenly become the center of attention. Treasury bonds aren’t known for being particularly exciting, but that has changed over the past year as their yields have risen to levels last since a decade and a half ago. 

For investors who want to get in on the excitement—or who just want to take advantage of the current high yields—there’s perhaps no better way to do so than with exchange-traded funds.  

What Are Treasury Bonds? 

Treasury bonds are debt securities issued by the U.S. federal government that are considered to be “risk free.” An investor in a Treasury bond will get paid back in full at the time of maturity. 

“Treasury bonds” is an umbrella term that refers to several different flavors of Treasury securities. The most popular are bills, which have terms of a year or less; notes, which have terms of between two and 10 years; and bonds, which have terms of 20 to 30 years.  

In addition to regular Treasuries, the federal government issues Treasury Inflation-Protected Securities, or TIPS, and floating-rate notes, or FRNs. 

Each type of Treasury has different risk/reward characteristics, but all of them share one important attribute: They have no credit risk. 

No Default Risk 

Unlike bonds issued by other entities, U.S. Treasuries are guaranteed to be paid back in full and on time. That, however, doesn’t mean that investors in these bonds can’t lose money. 

The primary risk that investors in Treasuries face is interest rate risk, or the fluctuations in a bond’s price caused by changes in interest rates. 

Usually, the shorter a Treasury’s term, the less interest rate risk it has, while the longer its term, the more interest rate risk it has. 

In that regard, T-bills are the safest Treasuries, while long bonds with terms of up to 30 years are the riskiest. 

That doesn’t mean that T-bills are better than long bonds, though. Sometimes investors want the greater interest rate sensitivity that comes with longer-term bonds. 

More duration, or interest rate sensitivity, can pay off if interest rates go down, pushing bond prices up. 

Inflation Protection  

TIPS work in the same way as traditional Treasuries in the sense that they have varying terms of up to 30 years. Their price also moves in the opposite direction to that of interest rates. 

But investors in TIPS get an added benefit in that they are protected from unexpected inflation. TIPS’ principal value is adjusted upward based on the rate of inflation, as measured by the Consumer Price Index.  

Because of this inflation protection, TIPS are viewed on a “real interest rate” basis—the yield investors receive after accounting for expected inflation. 

Generally, investors are better off in TIPS compared with normal Treasuries when inflation is higher than expected, while they are better off in normal Treasuries when inflation is lower than expected.  

Interest Rate Risk  

As you can see, while Treasuries are all on equal footing when it comes to credit risk, they vary quite a bit when it comes to interest rate risk—and that’s the primary dimension that investors look at when choosing which Treasuries to buy.  

But it’s not just interest rate risk per se. Interest rate risk goes hand in hand with reinvestment risk, or the risk that investors will have to reinvest their money at lower interest rates. 

Longer-term bonds have less reinvestment risk than shorter-term bonds because investors can lock in their money at high interest rates for a longer term. 

This dynamic isn’t as straightforward when it comes to ETFs because most Treasury bond exchange-traded funds don’t hold their bonds until maturity, but there are some that do.  

Yields of 5%

By now, you probably have a good sense of the benefits of investing in Treasuries.  

With Treasuries, investors get exposure to assets with no credit risk and the flexibility to choose the level of interest rate risk that’s right for them.  

Those characteristics are always attractive, and that is especially the case nowadays with yields on Treasury bonds above 5%.  
For the first time in a long time, investors can generate competitive levels of yield using Treasuries. They don’t have to reach for yield by investing in riskier bonds or even equities.  

For investors who are interested in adding exposure to Treasury bonds in their portfolios, ETFs are one of the best ways to do it. 

There are now 93 U.S.-listed Treasury bond ETFs on the market, from T-bill funds to TIPS funds. 

Most Popular Treasury ETFs 

Our Treasury bond ETF topics page is a great way to sort through the many Treasury bond ETFs that are available. The list of funds can be sorted by assets under management, expense ratios and three-month total returns.  

Currently, the iShares 20+ Year Treasury Bond ETF (TLT), which owns Treasuries with terms of 20 to 30 years, is the largest fund in the segment with$40 billion in assets under management. 

It’s followed by the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), with $36 billion in assets under management; the iShares 7-10 Year Treasury Bond ETF (IEF), with $27 billion in assets; and the iShares 1-3 Year Treasury Bond ETF (SHY), with $27 billion. 

These ETFs are a great way to get exposure to different segments of the Treasury market. There’s BIL, which has very little interest rate sensitivity, all the way up to TLT, which has a lot of it. 

Plenty of Options  

For investors who want broader exposure to the Treasury bond market, something like the iShares U.S. Treasury Bond ETF (GOVT) might make sense. 

If protection from unexpected inflation is a priority, then the iShares TIPS Bond ETF (TIP) is an option. 

Leveraged ETFs, like the Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF), are available for traders who want to take aggressive, speculative bets on the Treasury bond market. 

And ETFs like the iShares iBonds Dec 2028 Term Treasury ETF (IBTI) could be useful for investors who want exposure to bonds that are held to maturity, for a risk profile that’s similar to holding an individual Treasury bond to maturity.  

In addition to the aforementioned Treasury bond topics page, investors can use etf.com’s powerful screener to sort Treasury bond ETFs based on a plethora of characteristics. Start your search by selecting “Treasury ETF” under “etf.com Topics” on the left-hand side of your screen. 

93 ETFs Chart

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