How Canadian Investors Can Gain Access to the U.S. Treasury Market with ETFs

However, for Canadian investors, diving into the U.S. Treasury market isn't always straightforward. While it's possible to purchase single Treasury issues in Canada, the process can be cumbersome. The accessibility largely hinges on the brokerage platform used, and even then, the experience isn't as intuitive as trading stocks, given that bonds trade over the counter.

Fortunately, there's a solution that bridges this gap. Several Canadian ETF managers have recognized the demand and now offer exposure to U.S. Treasuries through ETFs, which provides greater transparency, liquidity, and cost-effectiveness.

Whether you're looking to hedge against economic uncertainty or diversify your portfolio, these ETFs can be an excellent choice. Let’s examine some picks that grant exposure to the short, intermediate, and long segments of the U.S. Treasury yield curve.

Short-Term Treasury ETFs: Keeping Interest Rate Risk Low

The yield curve is a graphical representation of the interest rates on debt for a range of maturities. It's divided into three primary segments: short, intermediate, and long-term.

The short end of this curve pertains to Treasuries with maturities that range from a few days up to 3 years. These instruments typically include Treasury bills (T-bills), which have maturities of under a year and short-term Treasury notes.

Due to their short maturity and the backing of the U.S. government, they are often viewed as one of the safest investments available. This safety translates to relatively predictable returns for investors and lower interest rate risk.

Additionally, their high liquidity ensures that investors can access their funds with ease when needed. In a diversified portfolio, short-term Treasuries can act as a stabilizing force, especially during volatile market conditions when equities might be underperforming.

However, like all investments, short-term Treasuries come with a set of risks. While they are less sensitive to interest rate changes compared to long-term Treasuries, they aren't entirely immune. An unexpected rise in interest rates can still impact their pricing.

Inflation is another concern. If these Treasuries are held to maturity, the real return, after accounting for inflation, might be minimal or even negative. This is especially true in an environment where inflation is on the rise.

Lastly, there's the risk of opportunity cost. Given their inherent safety, short-term Treasuries often offer lower yields compared to riskier assets. This means that investors might miss out on potentially higher returns from other investment avenues.

The following Canadian ETFs provide exposure to short-term U.S. Treasuries:

• Horizons 0-3 Month U.S. T-Bill ETF (UBIL.U)
• Guardian Ultra-Short U.S. T-Bill Fund (GUTB.U)
• BMO (TSX:BMO) Short-Term US Treasury Bond Index ETF (ZTS)

Intermediate-Term Treasuries: The "Goldilocks" Option

Intermediate-term Treasuries, with maturities ranging from 3 to 10 years, sit comfortably between the short and long ends of the yield curve. For many passive investors, they represent a "Goldilocks" option – not too short, not too long, but just right.

These securities strike a balance, typically offering higher yields than short-term Treasuries without the heightened sensitivity to interest rate changes seen in long-term Treasuries. This middle ground makes them particularly appealing, especially in uncertain economic climates.

They provide a blend of decent returns with the safety and stability that Treasuries are known for, serving as a hedge against the volatility of riskier assets.

However, they're not without risks. While they're less volatile than long-term Treasuries, they can still experience price fluctuations due to changing economic conditions and monetary policies.

But for passive investors seeking a balanced approach, intermediate-term Treasuries often emerge as the "just right" choice, offering a harmonious blend of risk and reward.

The following Canadian ETFs provide exposure to intermediate-term U.S. Treasuries:

• BMO Mid-Term US Treasury Bond Index ETF (ZTM)
• Horizons US 7-10 Year Treasury Bond ETF (HTB)

Long-Term Treasuries: Navigating the Far End of the Yield Curve

Venturing to the far end of the yield curve, we find long-term Treasuries, which typically have maturities exceeding 10 years. These securities, while still backed by the full faith and credit of the U.S. government, come with a unique set of characteristics.

One of the most notable features of long-term Treasuries is their heightened sensitivity to interest rate changes. In periods of rising rates, they can exhibit volatility levels comparable to equities.

This pronounced fluctuation can be jarring for investors who might expect bonds, even long-term ones, to be inherently stable. However, it's essential to understand that the longer the maturity, the greater the bond's price will react to interest rate shifts.

Yet, despite this potential for volatility, long-term Treasuries have historically played a crucial role in portfolio diversification, especially during market downturns. When equity markets crash, central banks often respond by slashing interest rates to stimulate economic activity.

In such scenarios, the prices of long-term Treasuries tend to rise, providing a counterbalance to the declining equity values. This inverse relationship has made them a valuable safety net for investors, offering a refuge during tumultuous times.

The following Canadian ETFs provide exposure to long term U.S. Treasuries:

1. BMO Long-Term US Treasury Bond Index ETF (ZTL)
2. TD (TSX:TD) U.S. Long Term Treasury Bond ETF (TULB)
3. iShares 20+ Year U.S. Treasury Bond Index ETF (XTLT)

This content was originally published by our partners at the Canadian ETF Marketplace.