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Buying Individual 3-Month Treasuries vs. a Short-Term Treasury ETF-- Thoughts?
I'm inclined to just keep buying a new batch of 3 month bills every month, but my broker is saying its more convenient to do an ETF such as SHV. What is the wisdom of the board on this one?
I am using USFR (floating-rate Treasury Note ETF). These FRNs pay 3m yield (reset weekly, so little duration) PLUS a spread MINUS the ETF ER (15 bps). The FRNs have been attractive since mid-2022 when the Fed started raising rates. Think of FRNs as 3m on weekly roll.
My second-tier emergency fund is in 30-day treasuries rolling over each month. Might do the next one at 6-mo depending on the then-rates the week they come due.
Agree than 3 month T bill is good for yield over 5.3% (1/4 of that for 3 months). So I am buying longer duration T bills, 6 months and 1 year T bills. 6 month is the sweet spot.
Buying individual T bills and rolling it when they mature takes a bit of work. Fidelity has that feature but Vanguard does not. Short term treasury ETFs (typically 2 yr duration) have more volatility as yields move upward. In term of trading, ETFs are liquid and easy to trade. I have not sold T bills before maturity but I understand they are readily bought and sold in secondary market. So there are plus and minuses on both options, and I use both of them.
USFR is another safe option as @yogibb noted earlier.
One week return of those five ETFs (data from M*): CLOA: +0.06% FLOT: +0.13% FLRN: +0.13% FLTR: +0.07% VRIG: +0.12%
For reference: USFR: +0.10% (one week)
I'm not too inclined to use CLOA, both because it is new (no track record, two orders of magnitude smaller than the category elephants - larger bid/ask spread), and because investing in CLOs, even AAA tranches, doesn't make me comfortable.
While the BlackRock AAA CLO ETF (the “Fund”) will invest primarily in CLO tranches that are rated AAA, such ratings do not constitute a guarantee of credit quality and may be downgraded. In stressed market conditions, it is possible that even senior CLO debt tranches could experience losses due to actual or perceived defaults, and rating downgrades and forced liquidations of underlying collateral. CLO securities may be less liquid than other types of securities and there is no guarantee that an active secondary market will exist or be maintained
Those FR ETFs are doing well this year. Other FR/BL funds are up 8-10% YTD. As short term junk bonds, they do have downside risk during stress period such as March 2020 (COVID-19) and lost in high single digits. BL/FR recovered in the same year as FED cut rate to near zero. For tax-deferred account, these ETFs are good substitute for cash, but keep the eyes open as the market condition deteriorates.
USFR is another option besides T bills in taxable account, since both are state tax-exempt.
Comments
Buying individual T bills and rolling it when they mature takes a bit of work. Fidelity has that feature but Vanguard does not. Short term treasury ETFs (typically 2 yr duration) have more volatility as yields move upward. In term of trading, ETFs are liquid and easy to trade. I have not sold T bills before maturity but I understand they are readily bought and sold in secondary market. So there are plus and minuses on both options, and I use both of them.
USFR is another safe option as @yogibb noted earlier.
Ultra short term IG floating rate bond ETFs did nicely. I've been considering using them in lieu of bond funds in tax sheltered accounts for now.
"All" floating rate ETFs, including bank loan, HY, and IG:
https://etfdb.com/etfs/bond/floating-rate-bonds-/
Comparison of five IG floating rate ETFs (from Fidelity website)
One week return of those five ETFs (data from M*):
CLOA: +0.06%
FLOT: +0.13%
FLRN: +0.13%
FLTR: +0.07%
VRIG: +0.12%
For reference:
USFR: +0.10% (one week)
I'm not too inclined to use CLOA, both because it is new (no track record, two orders of magnitude smaller than the category elephants - larger bid/ask spread), and because investing in CLOs, even AAA tranches, doesn't make me comfortable. https://www.blackrock.com/us/individual/literature/product-brief/blackrock-clo-aaa-etf-product-brief-stamped.pdf
USFR is another option besides T bills in taxable account, since both are state tax-exempt.