Single Treasury ETF’s Assets Double in a Day
TBIL registered inflows of nearly $600 million on Tuesday.
A new Treasury bond exchange-traded fund doubled its assets in a single day earlier this week, but the inflows aren't exactly what they seem. The US Treasury 3 Month Bill ETF (TBIL) registered inflows of $582 million on Tuesday, according to data from Bloomberg.
That pushed the fund’s assets under management to $1.15 billion, double the $568 million the fund had the day before.
TBIL's inflows are the result of "heartbeat trades," a technique used by fund managers to minimize capital gains distributions and maximize tax efficiency.
As outlined in an excellent piece by Elisabeth Kashner, director of ETF research and analytics for FactSet, large inflows that reverse a few days later help fund managers wash out capital gains from low-basis stock positions.
As Kashner explains, most exchange-traded funds don’t realize much in the way of capital gains thanks to the secret sauce of the ETF structure—the creation/redemption mechanism.
“ETFs largely avoid passing on [capital gains] using two methods,” she said. “First, most ETFs create and redeem shares in kind. This allows portfolio managers to pass low-basis positions out of the portfolio without selling them. No sale, no realized gain, no tax. Second, many ETFs track low-turnover indexes, so ETF portfolio managers seldom need to realize gains in a rebalance.”
That said, certain ETFs are at risk of large capital gains distributions. According to Kashner, funds that have low-redemption activity and high portfolio turnover are the most likely to be in that category.
Without a steady stream of day-to-day redemption activity to wash out low-basis positions from the fund, come rebalance time—when large amounts of stocks are bought and sold—these ETFs could realize hefty capital gains.
Fortunately, there’s a process that helps ETFs short-circuit that undesirable scenario.
According to Kashner, the process is as follows: “Behind the scenes, someone provides short-term capital to fund share creations in ETFs slated to rebalance their portfolios. The capital is required for less than a week, and often for just one to three business days. The capital can be returned as soon as those shares are redeemed. This short-term access to capital allows ETF portfolio managers to essentially manufacture redemptions that wash out capital gains that would otherwise be realized in a rebalance.”
This is likely what happened to TBIL, a fund with relatively high portfolio turnover that is a result of its strategy to continuously hold "on-the-run" T-bills (ETF.com confirmed that Tuesday's inflows were the result of a heartbeat trade).
Over the past month, prices for Treasuries have rallied sharply, leading to gains for ETFs holding those bonds. Heartbeat trades help the fund avoid realizing those gains.
TBIL's $582 million of inflows on Tuesday were one side of the heartbeat trade. The ETF will likely register a similar-sized outflow on Wednesday.
A New Type of Bond ETF
TBIL is a relatively new ETF, having launched in August 2022. The fund is one of several single-bond ETFs launched by F/m Investments last year.
These ETFs hold the most recently auctioned Treasury bill, note or bond of a stated maturity. In the case of TBIL, that would be the most recently auctioned three-month T-bill.
This single-security portfolio contrasts with most other Treasury ETFs, which hold a basket of different Treasury securities with varying maturities. For instance, the iShares 0-3 Month Treasury Bond ETF (SGOV) holds Treasuries with maturities ranging from zero to three months.
For most investors, single-bond ETFs don’t offer any benefits beyond what you get with other bond ETFs. But for institutional investors with sophisticated trading strategies, the more fine-tuned exposure that these funds provide might be useful.
Heartbeat trade aside, TBIL has seen strong asset growth this year. Entering the week, the ETF had nearly $570 million in assets under management, up from $200 million at the start of the year.
Investors have clamored to Treasury ETFs in general this year. The iShares 20+ Year Treasury bond ETF (TLT), the iShares 7-10 Year Treasury Bond ETF (IEF) and the iShares Short Treasury Bond ETF (SHV) are all among the top 10 asset gatherers of 2023, with year-to-date inflows of $3 billion to $5 billion each.
Email Sumit Roy at [email protected] or follow him on Twitter @ sumitroy2