Navigate higher Treasury yields with ETFs
March 29, 2023
March 29, 2023
For the first time in more than a decade, U.S. Treasury securities offer meaningful yields, but many advisors and their clients continue to be wary of these bonds.
That's understandable, especially after last year's extreme tumult in the bond market. If you kept Treasuries on the sidelines, you're not alone. In 2022, about 70% of advisor portfolios underweighted Treasuries compared with the Bloomberg U.S. Universal Index, according to an analysis of 485 fixed income portfolios by Vanguard Advisor Portfolio Analytics and Consulting®.1
Federal Reserve interest rate increases have changed the Treasury equation. We believe the outlook for Treasuries has brightened considerably. As a result, you may want to consider reallocating some of your clients' money into Treasury funds to lock in yields that haven't been in these ranges in a decade and may not last.
Starting in summer 2022, yields ascended well above 3% and have remained there. While the Fed may raise rates more, additional rate hikes might not result in negative returns because bond investors already priced some of those expectations into valuations.
In our fixed income outlook for the first quarter of 2023, we anticipated continued volatility, but higher starting yields put bond investors in a stronger position this year compared with 2022. Yields on investment-grade corporate bonds may appear attractive relative to previous levels, but Treasuries still retain the edge because spreads between high-grade corporate and Treasury bonds remain thin. Treasuries also are more likely to offer stronger protection during a bear-market flight to safety.
We designed our Treasury ETF lineup with three funds as building blocks so that you can construct efficient, straightforward, low-cost portfolios.
With this suite of Vanguard U.S. Treasury ETFs, you can tailor portfolios to individual clients and accomplish a wide range of goals:
You can always count on us to strive to help your clients keep more of their money in their pockets. Our suite of Treasury ETFs accomplishes this in two ways.
Cost advantage Number one: Because our Treasury ETFs are so liquid, it is less expensive to buy the ETF (in terms of bid-ask spread) than to buy the individual bonds. These lower trading costs offset 75% to 100% of the ETF's expense ratio for your clients.
|Vanguard ETF||ETF bid-ask spread||Underlying securities' spread||ETF expense ratio|
|Short-Term Treasury ETF (VGSH)||2 basis points||5 basis points||4 basis points|
|Intermediate-Term Treasury (VGIT)||2 basis points||5 basis points||4 basis points|
|Long-Term Treasury (VGLT)||4 basis points||17 basis points||4 basis points|
Source: Vanguard, using Bloomberg data as of December 30, 2022.
Note: Vanguard estimated the underlying bond bid-ask spread using Bond Liquidity Analysis, a proprietary calculation that uses Bloomberg data to estimate an aggregated bid-ask spread for the underlying portfolio of bonds for the 20 trading days ended December 30, 2022.
Cost advantage Number two: Besides tight bid-ask spreads, Vanguard's expense ratios beat the industry average by a significant margin across maturities:
|Vanguard ETF||Fund expense ratio||Lipper peer average|
|Short-Term Treasury (VGSH)||4 basis points||33.1 basis points|
|Intermediate-Term Treasury (VGIT)||4 basis points||20.9 basis points|
|Long-Term Treasury (VGLT)||4 basis points||20.9 basis points|
Source: Lipper data as of December 31, 2022.
As 2022 so painfully proved, markets are always unpredictable, but current Treasury yields look strong, especially given the meager bond returns of the last decade. While market volatility may continue, higher yields across fixed income markets historically have provided more of a cushion against negative returns. Given that many advisors underweighted Treasuries, you may want to consider adding to your allocations to lock in rates that are relatively high.
1 Vanguard, using portfolio data aggregated by Vanguard Advisor Portfolio Analytics and Consulting from January 1, 2022, through November 30, 2022.
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