Best Treasury ETFs: T-Bill, T-Note, T-Bond Strategy Comparison
CORE INSIGHTS
- Duration is Key: The length of the bond (T-Bill vs. T-Bond) directly measures its risk and volatility due to interest rate changes.
- T-Bills for Safety: Short-term Treasury ETFs (T-Bills) are the safest for cash, as their price is minimally affected by interest rate hikes.
- Long-Term Volatility: T-Bond ETFs (long duration) offer the most price appreciation if rates fall, but the most severe losses if rates rise.
Treasury securities—T-Bills, T-Notes, and T-Bonds—are often viewed as the safest long-term investing assets due to their zero credit risk (backed by the U.S. government). However, when purchased through an ETF, these instruments carry significant interest rate risk based on their duration. Understanding the maturity differences is crucial for asset allocation and managing retirement income.
Imagine you buy a long-term bond ETF with a 15-year duration.
• If the Fed raises interest rates by 1%, the ETF’s price is expected to immediately drop by 15%.
• Conversely, a 1% rate cut would boost the price by 15%.
The duration (not the maturity date) tells you the true price volatility of your bond fund.
Visualizing Duration Risk vs. Reward
The chart below illustrates the trade-off. Short-term funds (T-Bills) offer the lowest risk but also the lowest potential returns if interest rates decline. Long-term bonds (T-Bonds) carry the most risk but offer the highest growth potential in a rate-cutting environment.
*This chart demonstrates the relationship between duration (risk) and yield. It is for illustrative purposes only.*
Expert Insight:
For retirement planning, the purpose of the Treasury portion of your portfolio should be clearly defined. Use T-Bill ETFs for the Emergency Fund and short-term cash needs, and use T-Note/T-Bond ETFs only for the portion of your portfolio intended to counterbalance stock volatility over a multi-decade long-term investing horizon.
Comparing Treasury Maturities (ETFs)
| ETF Type | Example ETF | Average Duration | Primary Role |
|---|---|---|---|
| Short-Term (T-Bill) | SGOV, BIL, VGSH | < 1 year | Liquidity, Cash Preservation |
| Intermediate-Term | IEI, IEF | 3 – 10 years | Balanced Stability and Income |
| Long-Term (T-Bond) | TLT, EDV | 15 – 25 years | Counter-Balance to Stocks (Maximum Volatility) |
Strategic Action Steps
If you need cash in 1 year, your portfolio should have a 1-year duration. If you need balance for a 20-year retirement planning horizon, you can safely tolerate a higher duration.
Treasury income is exempt from state and local income tax. This makes T-Bill and T-Note ETFs highly tax-efficient for investors in high-tax states when held in a taxable brokerage account.
If you are nearing retirement, holding too much long-duration debt (like TLT) exposes you to severe principal loss if rates rise, directly impacting your ability to fund withdrawals.
The Bottom Line: Which Bond Should You Use?
- Choose Short-Term (T-Bills) if: You need high liquidity and safety (Emergency Fund or near-term expenses).
- Choose Intermediate/Long-Term (T-Bonds) if: You are actively trying to hedge stock market risk over a multi-decade long-term investing horizon.
FAQ
Treasury interest is exempt from state and local tax, but it is still subject to federal income tax.
A T-Bill matures in one year or less. A T-Bond matures in 20 to 30 years. The vast difference in maturity creates the huge difference in duration risk.
Yes, mathematically. The older, lower-yielding bonds in the fund become less valuable, causing the Net Asset Value (NAV) to drop.