Short Term Treasury ETFs In Spotlight After Election

Trump’s victory ignited expectations for higher rates and inflation, and cast a new light on short-dated Treasury ETFs.

Donald Trump’s electoral victory has had an immediate impact on the Treasury curve, pushing longer-dated yields higher amid expectations that the president-elect’s push for tax cuts and increased infrastructure spending will trigger inflation.

The market is said to be pricing in a 95% chance of a rate hike in December now, and the 10-year Treasury yield jumped some 21% in one week, going from 1.83% the day before the election, Nov. 7, to 2.22% a week later—its highest read since early January.

As BlackRock’s Richard Turnill said in a commentary this week, “Reflationary environments—characterized by stronger nominal economic growth—tend to help boost assets such as commodities and value stocks and hurt many perceived safe havens.”

‘Reflation Theme Building’

“A reflation theme is building amid signs of rising price pressures, central banks signaling a greater tolerance to let inflation run hotter and policy emphasis shifting to fiscal stimulus. We see Donald Trump’s election to the U.S. presidency and the Republican majority in Congress amplifying this dynamic in the short term,” he said.

In the ETF market, short-dated bond funds are in the limelight on the heels of the election, benefiting from the steepening of the curve. The longer dated a bond is, the more sensitive it is to changes in interest rates, thus the renewed demand for shorter-term exposure.

The iShares 1-3 Year Treasury Bond ETF (SHY) is the largest—$11 billion in assets—and most liquid short-dated Treasury ETF in the market today. SHY has gathered $119 million in fresh net assets in the past week alone.

To put those net creations into perspective, consider that SHY had been a net asset loser so far in 2016, up to the day before the election. And here’s how it’s been performing in 2016 relative to the iShares 20+ Year Treasury Bond ETF (TLT):

As an investor, if you are taking another look at short-term Treasury ETFs, SHY is the biggest short-term Treasury fund, and the most liquid, but not the only one. There are four ETFs competing in this segment, as well as a pair of bull/bear strategies. Here’s how these funds compare:

• SHY has a duration of 1.88 years, and a 30-day yield of 0.74%. When it comes to cost, SHY isn’t the cheapest, but it’s by far the most liquid. The fund trades on average more than $200 million a day at a 0.01% average spread. No other ETF in this segment comes even close. SHY has a 0.15% expense ratio, putting its total cost of ownership at about $16 per $10,000 invested.
   
• The Schwab Short-Term US Treasury ETF (SCHO) has $1.26 billion in total assets—the second-largest fund in this segment—and a liquid option for investors, but nowhere near SHY’s levels. The fund trades about $10 million on average a day, with an average spread of 0.03%. With an expense ratio of 0.08%—the segment’s lowest—investors are shelling out about $11 per $10,000 invested to own and trade this ETF. SCHO has duration of 1.94 years for a 30-day yield of 0.78%.
   
• The SPDR Bloomberg Barclays Short Term Treasury ETF (SST) has $151 million in assets. The fund costs 0.10% in expense ratio, but it struggles with thin trading volume of about $2 million on average a day, and wide trading spreads, averaging 0.14%. All in, this ETF is the costliest to own and trade in this segment, at about $24 per $10,000 invested, but it’s also this year’s best performer, as the chart below shows. SST has adjusted duration of 2.76 years for a 30-day yield of 0.95%.
   
• The PIMCO 1-3 Year US Treasury Index ETF (TUZ) has $99 million in total assets—the smallest ETF in this segment. The fund’s liquidity is an issue, trading on average only about $2 million a day, with an average spread of 0.06%. With an expense ratio of 0.15%, TUZ costs investors about $21 per $10,000 invested, or nearly twice the price of SCHO. TUZ has duration of 1.84 years for a 30-day yield of 0.69%. 

Charts courtesy of StockCharts.com

Contact Cinthia Murphy at [email protected]