Risk and reward walk hand in hand. Traditionally, investors seeking higher yields would often gravitate towards assets like dividend stocks or Real Estate Investment Trusts (REITs), prepared to undertake the associated equity risks.
However, with the 3-month Treasury bill (T-bill) rate soaring to a remarkable 5.5%, a compelling question presents itself: Why would one risk capital in equities when a nearly risk-free T-bill offers a better yield?
An inverted yield curve further deepens this conundrum. For those unfamiliar, an inverted yield curve occurs when short-term interest rates exceed their long-term counterparts, often viewed as a predictor of an upcoming recession.
Specifically, the New York Fed's model focuses on the "term spread" – the difference between the 10-year and the 3-month Treasury rates. This very metric now suggests a daunting 70% probability of a recession by May 2024.
In such volatile environments, the allure of T-bills becomes evident. The phrase "paid to wait" takes on a literal sense, as investors can benefit from these attractive yields in the short-term, all the while patiently observing the Federal Reserve's maneuvers to engineer a soft landing.
For those who find the prospect of individually purchasing Treasurys on platforms like TreasuryDirect tedious or the task of personally managing a ladder daunting, there's good news: you can outsource the portfolio management to a low-cost ETF.
Currently, NYSE ARCA boasts three notable ETF options for T-bills, each yielding upwards of 5%. Here's a breakdown of what investors can expect with each one.
SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
As of September 25, investors who buy BIL can expect an average yield to maturity of 5.35%, with a duration of just 0.09 years. In other words, you're earning a decent yield for what amounts to virtually no interest rate risk – all backed by the ironclad credit rating of the U.S. government.
Like most bond ETFs, BIL pays out distributions on a monthly basis, as opposed to individual T-bills that are auctioned at a discount and payout their par value at maturity, with the difference representing the interest accrued and owed to investors. The ETF charges a 0.1354% expense ratio.
iShares 0-3 Month Treasury Bond ETF (SGOV)
To compete with BIL, iShares launched SGOV in May 2020, and it has accumulated just over $15 billion in AUM since its debut. This ETF tracks the ICE (NYSE:ICE) 0-3 Month US Treasury Securities Index, which goes even further down the short end of the yield curve compared to BIL.
That being said, the ETF's metrics are fairly similar. We're also looking at a duration of 0.09 years against an average yield to maturity of 5.39%. Like BIL, SGOV also pays out monthly distributions. Interestingly enough, SGOV's credit quality is listed as "AA rated," likely due to the recent Fitch downgrade.
To entice BIL investors over, iShares has implemented a fee waiver for SGOV, down from a gross 0.13% expense ratio to a net 0.07% expense ratio. According to iShares, this waiver will remain in place until the end of June 2024.
Global X 1-3 Month T-Bill ETF (CLIP)
The newest competitor in the T-bill ETF space is CLIP, launched by Global X in June 2023 in a departure from their usual derivative income and thematic equity focused lineup. This ETF looks to track the Solactive 1–3-month US T-Bill Index and currently has 27 holdings.
In terms of portfolio metrics, you get something similar to BIL and SGOV, with a duration of 0.11 years and a yield to maturity of 5.51%, the highest of the trio so far, but keep in mind that this can fluctuate. Like BIL and SGOV, CLIP will also make monthly distributions.
In terms of fees, CLIP rivals SGOV with a 0.07% expense ratio. However, this is without any contractual waivers in place, making it arguably the cheapest priced among the trio. Having crossed the $50 million AUM threshold, this ETF now has a much lower risk of being closed down.
This content was originally published by our partners at ETF Central.