Treasury ETFs: Filling In The Duration Spectrum

by on August 19, 2010 | ETFs Mentioned:

There was a time not that long ago when investors harbored significant concerns over including fixed income ETFs within their portfolio. When the first bond ETFs were introduced many were uncertain that the marriage of fixed income and the exchange-traded structure would be an efficient and productive one. But as these securities have build a track record the investor comfort level has skyrocketed, along with total fixed income assets. 

A wave of general risk aversion has washed over financial markets in 2010, sending investors flocking to safe haven investments. That has caused the size of the Government Bonds ETFdb Category to swell; the 25 ETFs offering exposure to this asset class now have aggregate assets north of $15 billion. When making a bet on bonds, one of the most important decisions investors make relates to duration. Generally speaking, a longer time until maturity means a more attractive yield. In return, investors take on additional interest rate risk; if rates climb, longer-dated securities will tend to experience a bigger drop. The most popular ETF for long-term Treasury exposure is the Barclays 20+ year Treasury Bond Fund (TLT), which has almost $3.5 billion in assets [see also Long-Term Bond ETFs: Coming Back In Style].

On the other end of the spectrum are the less risky short term bond ETFs, many of which currently offer returns close to zero. In addition to a number of money market ETFs, the Barclays 1-3 Year Treasury Bond Fund (SHY) is a popular choice–it currently has about $8.5 billion in assets.

But there is a lot more to the government bond ETF space than these two ends of the spectrum. In fact, a number of funds fall in between TLT and SHY, offering exposure to a middle ground that allows investors to pick up some additional yield in exchange for a bit of interest rate risk. For investors seeking to bridge the gap in the fixed income world, we outline various options below [for more ETF ideas, sign up for our free ETF newsletter]:

PIMCO 3-7 Year U.S. Treasury Index Fund (FIVZ): This ETF offers a slight yield upgrade from SHY by tracking the BofA Merrill Lynch 3-7 Year US Treasury Index, a benchmark that measures the performance of the direct Sovereign debt of the U.S. As the name suggests, all of the debt securities held by FIVZ will mature in three to seven years. The majority of this fund’s holdings pay a coupon rate between 1 and 4% [see Low Cost ETFs: Complete List of The Cheapest Exchange Traded Funds].

iShares Barclays 7-10 Year Treasury Bond Fund (IEF): This fund moves further along the duration spectrum by replicating the Barclays Capital U.S. 7-10 Year Treasury Bond Index, a benchmark that measures the performance of U.S. Treasury securities that have a remaining maturity of at least seven years and less than 10 years. The coupon rates of IEF generally fall between 3% and 5%, and the weighted average maturity is about 8.5 years.

SPDR Barclays Intermediate Term Treasury ETF (ITE): This fund measures the Barclays Capital U.S. Intermediate Treasury Index, which includes all publicly issued, U.S. Treasury securities that have a remaining maturity of greater than or equal to 1 year and less than 10 years, are rated investment grade, and have $250 million or more of outstanding face value. Given the wide range of maturities, ITE provides exposure to coupon rates all across the board [also see What's In A Name: A Look Inside ETF Tickers].

PIMCO 7-15 Year U.S. Treasury Index Fund (TENZ): This ETF follows the BofA Merrill Lynch 7-15 Year US Treasury Index, which tracks the performance of the direct Sovereign debt of the U.S. Government with at least $1 billion in outstanding face value and a remaining maturity of at least seven years and less than 15 years.

iShares Barclays 10-20 Year Treasury Bond Fund (TLH): TLH tracks the Barclays Capital U.S. 10-20 Year Treasury Bond Index, a benchmark comprised of U.S. Treasury securities that have a remaining maturity of at least 10 years and less than 20 years. Most of the underlying holdings of this ETF pay coupons between 6% and 8%, although the yield to maturity barely tops 3%.

Vanguard Intermediate-Term Government Bond Index Fund (VGIT): This ETF measures the Barclays Capital U.S. 3-10 Year Government Index, which includes fixed income securities issued by the U.S. Treasury and U.S. government agencies and instrumentalities, as well as corporate or dollar-denominated foreign debt guaranteed by the U.S. government, with maturities between three and ten years [see more information on VGIT's holdings here].

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Disclosure: No positions at time of writing.