Exchange-traded funds that focus on U.S. Treasury bonds are a simple way to add low-risk investment opportunities to a portfolio. These funds now come with an added benefit: higher yields without the kind of credit risk that could become a problem during a recession, when bond issuers have a hard time paying back the money they’ve borrowed.
Thanks to the Federal Reserve’s aggressive interest rate increases in 2022 and 2023, yields on U.S. Treasury bond funds have been at their highest levels in years.
For example, the highest-yielding fund in our group, Vanguard Extended Duration Treasury ETF, is paying out 4.43%. One year ago the yield stood at 3.75%, while two years ago it was 2.20%. Meanwhile, Vanguard Short-Term Treasury ETF is yielding 4.40%, little changed from one year ago but up significantly from 0.96% in February 2022. More broadly, the average yield on intermediate government bond funds is 3.47%. On short government bond funds, the average is 3.78%, while on long government bond funds it’s 3.85%.
Investors buying short-term bond funds must understand that because the funds hold bonds that mature in just a few months, those yields could also come down quickly should the Fed start to cut interest rates, as the market currently expects. That would mean the funds would have to buy new bonds at lower yields. Long-term bond ETFs are more sensitive to changes in interest rates than shorter-term bond ETFs. If interest rates fall, returns on longer-term funds would be expected to outpace those from short-term ones. The reverse would be true should rates rise again.
Comparing Yields On Bond Funds
One of the key comparison metrics here is the SEC yield, an annualized measure of what a fund has paid to investors over the past 30 days. That figure doesn’t reflect the yield investors would receive going forward.
Morningstar associate analyst Zachary Evens notes that since Treasury funds all have similar credit quality, the main difference between them is their durations—how sensitive each investment is to changes in interest rates. As interest rates rose in 2022 and 2023, funds with longer durations suffered the most, but when interest rates began to fall late last year, longer-duration funds performed well.
Screening for High-Yielding U.S. Treasury ETFs.
For this screen, we perused government bond ETFs, limiting our search to funds that invest only in U.S. Treasury bonds. We looked for ETFs that carry Morningstar Medalist Ratings of Gold, Silver, or Bronze, as well as ETFs that have $100 million or more in assets. From there we ranked the ETFs based on their SEC yields, choosing the five highest. Four of the ETFs that passed the screen are in the long government bond category, while one is in the short category.
Thanks to the Federal Reserve's aggressive interest rate increases in 2022 and 2023, yields on U.S. Treasury bond funds have been at their highest levels in years. For example, the highest-yielding fund in our group, Vanguard Extended Duration Treasury ETF, is paying out 4.43%.
For many investors, investing in the right bond funds can be a better option than holding a portfolio of individual bonds. Bond ETFs can provide better diversification — often for a lower cost — can offer higher liquidity, and can be easier to implement.
These bonds are inherently more risky than bonds issued by more credit-worthy companies, but with greater risk also comes greater potential for return. Identifying junk bond opportunities can boost a portfolio's performance, and diversification through high-yield bond ETFs can cushion any one poor performer.
They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government. Short-term Treasury ETFs specifically focus on Treasuries with shorter durations, which means these securities typically have maturities ranging from a few months to a few years.
But while they are lauded for their security and reliability, potential drawbacks such as interest rate risk, low returns and inflation risk must be carefully considered. If you're interested in investing in Treasury bonds or have other questions about your portfolio, consider speaking with a financial advisor.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
In other words, bond ETFs are at risk if the borrower defaults as this means they may not pay the entire amount of the bond back. While there is no debt to an equity ETF, the underlying companies can still incur losses and lose value.
Bond ETFs are affected by changing interest rates, because of the impact on the bonds in their underlying portfolios. When interest rates decrease, bond prices increase, and when interest rates rise, bond prices decline.
For many people, TreasuryDirect is a good option; however, retirement savers and investors who already have brokerage accounts are often better off buying bonds on the secondary market or with exchange-traded funds (ETFs).
CLIP will primarily invest in Treasury bills, making it an attractive option for investors seeking to potentially minimize credit and interest rate risks.
The largest high dividend yield ETF is the Schwab US Dividend Equity ETF (SCHD). The Vanguard High Dividend Yield ETF (VYM) is also a popular high dividend yield ETF.
The iShares 0-3 Month Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities less than or equal to three months.
The BondBloxx Bloomberg Five Year Target Duration US Treasury ETF seeks to track the investment results of an index which contains U.S. Treasury securities that have an average duration of approximately 5 years.
Address: Suite 447 3463 Marybelle Circles, New Marlin, AL 20765
Phone: +5816749283868
Job: Sales Executive
Hobby: Air sports, Sand art, Electronics, LARPing, Baseball, Book restoration, Puzzles
Introduction: My name is Jerrold Considine, I am a combative, cheerful, encouraging, happy, enthusiastic, funny, kind person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
/s3.amazonaws.com/arc-authors/morningstar/11520ec8-017f-48a5-99dd-e50a7df9126e.jpg "5 High-Yielding U.S. Treasury ETFs (1)")
/s3.amazonaws.com/arc-authors/morningstar/ed529c14-e87a-417f-a91c-4cee045d88b4.jpg "5 High-Yielding U.S. Treasury ETFs (2)")
