Maximum Safety in Treasury ETFs

I’ve just finished reading Martin’s new book, The Ultimate Depression Survival Guide. I highly recommend it. Martin says — and he’s exactly right — that the safest place in the world for your money is U.S. Treasury bills. In his book you’ll find a very handy list of money market funds that invest strictly in short-term Treasury securities: No commercial paper, bank notes, or other risky bonds.

But did you know you can also use exchange traded funds (ETFs) to invest in Treasury bills?

Many people think ETFs are just for more speculative investments like stocks or commodities, but that’s not true. You can buy and sell ETFs that hold things like short-term T-bills, too.

The U.S. Treasury is the world’s safest bank.

Treasury bills are the investment world’s Rock of Gibraltar. They’re backed by the “full faith and credit” of the United States Treasury. If you hold T-bills to maturity, you will get all of your principal and interest … guaranteed. The only way you can lose is if the U.S. government defaults on its debt. True, we’ve got our problems, but we aren’t a banana republic just yet.

If this sounds like what you’re looking for and you want to invest in Treasury bills, I suggest you take a look at these two ETFs …

The iShares SHV holds T-bills that mature in 12 months or less.

iShares Barclays Short Treasury Bond Fund (SHV): This ETF’s name is a little confusing. When they say “Short Treasury” they don’t mean it’s an inverse fund. The point they’re trying to make is that this ETF owns short-term Treasury securities — specifically those with a maturity of twelve months or less. Right now the average maturity of the bonds they’re holding is a little less than five months.

SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL): This ETF has an even narrower focus than SHV. In BIL, the longest maturity is only three months. The average maturity is currently about seven weeks. BIL’s name may be a bit confusing, too. The first word indicates that it’s a SPDR brand product from State Street. The “Barclays Capital” in the name means that it is based on an index maintained by Barclays.

Why should you care about maturity if all Treasury securities are so safe? Well, notice the caveat I used earlier: You can’t lose money in Treasury bills if you hold them to maturity. Like most bonds, a T-bill’s market value is exposed to interest rate risk. That means the longer the maturity, the more you’ll be hurt if you have to sell your Treasury bills while interest rates are rising.

Buying either SHV or BIL basically gives you what bond traders call a short-term “laddered portfolio.” As the Treasury securities in the portfolio mature, they are replaced with new ones. Both ETFs also pay a monthly coupon that will vary over time, based on prevailing short-term interest rates.

Do SHV and BIL have the same advantages as other ETFs? You bet they do!

They’re Liquid: You can buy and sell SHV and BIL at a moment’s notice, any time the markets are open. You can also use advanced features like limit orders and stop-loss orders.

They’re Inexpensive: These two ETFs have a tiny annual expense ratio of 0.15 percent or less. Go through a discount broker and your trading commissions can be negligible as well.

They’re Transparent: Both iShares and SPDR publish the holdings for all their funds on the Internet every day.

You see with SHV and BIL, even conservative investors can take advantage of the same features that have made ETFs the most popular new investment in years.

One word of warning: These are not money market funds or bank accounts. They aren’t insured by the FDIC, either. The prices fluctuate during the day, so it’s possible you could lose money, depending when you buy and when you sell. Trading in and out on a short-term basis is probably not a good idea.

But as I said above, these ETFs hold nothing but U.S. Treasury securities, so your risk is fairly minimal. The ideal use for SHV and BIL is when you want to park some cash in a safe place and you feel confident you’ll be leaving it there for several months or longer.

Treasury bill ETFs are a great parking place for your extra cash.

Which ETF is better? That depends on your objectives …

SHV holds longer-maturity Treasury securities, so it has a slightly higher yield right now.

But the day-to-day price of SHV fluctuates more than BIL, which makes it slightly riskier.

You’ll need to judge for yourself if the added return justifies the added risk.

If you are very concerned about safety, or you think interest rates are likely to go up in the near future, then BIL may be the right choice for you. Just keep in mind that you’ll pay for this safety in the form of a lower current yield.

What if you’ve never bought an ETF before?

Then either one of these funds will be a good place to start. You can buy a small position and get comfortable with the process. Even if you make a mistake it shouldn’t cost you very much. Once you see how it all works, you’ll be ready to consider moving into more aggressive ETFs when market conditions allow.

Best wishes,

Ron

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