August 05, 2008 at 6:00 am by Tom Lydon
Bonds, and bond exchange traded funds (ETFs) are a good place for investors to hang out and park their cash in uncertain times.
ETFs that invest in short-term Treasury bills are known for being one of the safest types of investments. SPDR Lehman 1-3 Month Treasury Bill ETF (BIL) invests in short-term Treasury bills and has an expense ratio of 0.14%, so most of the yield goes into your pocket.
Current yield, which can be calculated here, is an important indicator of a Treasury bill and if it’s a good time to go in. The only disadvantage of an ETF Treasury bill fund is that you have to pay a brokerage commission to buy and sell.
Another plus of buying a U.S. Treasury bill is that they are available straight from the government. So instead of paying retail, you have wholesale access from the Federal government. By buying direct you can reduce the fees that you pay. Vanguard Total Bond Market (BND) touts a 0.11% expense ratio and the annual fee rises only if your bond value rises. Some online brokers give free access to U.S. Treasuries as well, reports Matt Krantz for USA Today.
We think buying bonds through an ETF is the better way to go. Before bond ETFs came along, trying to get this kind of diversification would have been prohibitively expensive for the average investor. Now, they’re accessible to everyone.
There are around 15 ETFs with holdings in U.S. Treasuries. Because the liquidity in the underlying market is sufficient, the U.S. Treasury market is the largest in the world, reports Jonathan Bernstein for Seeking Alpha.
They include:
- iShares Lehman TIPS Bond (TIP): up 4.6% year-to-date
- SPDR Barclays TIPS (IPE): up 3.5% year-to-date
- Vanguard Extended Duration Treasury ETF (EDV): down 3.5% year-to-date
- iShares Lehman 1-3 Year Treasury Bond (SHY): up 2.5% year-to-date
For full disclosure, Tom Lydon’s clients own shares of TIP, SHY.
