When the ups and downs of the stock market get to be too much, when you can't decide whether China or Brazil is a better bet, when you are wondering if states like California can keep paying their bills, there is one place you can put your money that is almost certain to pay you back: U.S. Treasury debt. There are now about a dozen exchange traded funds devoted exclusively to Treasury debt, as well as several others that own zero-coupon Treasury securities, have Treasury Inflation Protected Securities (TIPS), or offer leveraged exposure to Treasuries.
Treasury ETFs are available from five different fund sponsors, and are typically organized as short term, with maturities of one to three years; intermediate term, with maturities of three to 10 years; and long term, with maturities of 10 to 30 years. They typically charge low expense ratios in the 0.1% to 0.2% range, and have anywhere from 10 to 100 individual holdings. As with Treasury securities, interest payments are exempt from state income taxes.
While the U.S. government is thought to be the world's best credit risk, Treasury securities and ETFs that own them do fluctuate in value, and they do have periods of negative returns: the iShares Barclays 20+ Year Treasury Bond Fund (TLT) gave investors a negative 21.5% return in 2009, and the iShares Barclays 10-20 Year Treasury Bond Fund (TLH) had a negative 8.4% return.
To identify attractive Treasury ETFs, we first grouped them by the length of their term, and chose one from each category. One fund, however, the PowerShares 1-30 Laddered Treasury Portfolio (PLW), transcends term categories by owning securities of all different maturities in equal proportions. It does not own Treasury Bills, which have a maturity of less than one year; TIPS; or zero coupon bonds, which are extremely sensitive to changes in interest rates. It pays interest income quarterly, with its most recent distribution equal to 4.29% annually.
Of the funds organized by maturity, Vanguard and PIMCO's Treasury ETFs are both less than one year old, and have yet to attract a significant base of assets or trading volumes, making them less attractive despite similar annual costs and recent performance. While State Street's two Treasury ETFs have been trading since 2007, they are far smaller and less frequently traded than comparable offerings from iShares.
