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Short-Term Treasury ETFs to Tap: Here's Why

Sanghamitra Saha

The year 2019 has seen a dovish Fed. The U.S. central bank recently announced that it will soon recommence purchases of short-term US Treasury bonds with maturities of one year and less to expand its balance sheet in hopes of averting a recurrence of the recent disruption in overnight “repo” markets. The Fed Chair Powell said the action is not same as the crisis-era programme known as quantitative easing, or QE, as the latest move is only to facilitate short-term lending, not to charge up the economy.

The move followed the recent spurt in the cost of borrowing cash overnight via repurchase, or repo, agreements to as high as 10%. To ease the pressure seen in September, the Federal Reserve Bank of New York injected billions of cash reserves into short-term lending markets.

Investors should note that the Fed has enacted two rate cuts this year and appeared to confirm market expectations of a 25 basis-point cut in U.S. interest rates at the Federal Open Market Committee’s Oct 29-30 meeting so that the U.S. economy can counter external shocks like Brexit and trade tensions, per Financial Times. The Fed’s preferred inflation measure currently sits at 1.8%, and has been at or below the U.S. central bank’s target of 2% for a long period o. This means that the Fed easing may continue in the coming days.

As of Oct 8, 2019, the yield on two-year benchmark U.S. treasuries was 1.42%, down from 1.56% noticed at the start of the year. The yield on six-month U.S. treasuries was 1.69% on Oct 8, down from 1.81% recorded at the start of the month.

ETFs in Focus

Against this backdrop, we highlight a few short-term treasury ETFs that could gain ahead on the Fed action. As yields slumped, these short-term bond ETFs should gain (see all Inflation-Protected Bond ETFs here).

iShares 1-3 Year Treasury Bond ETF SHY

The underlying ICE U.S. Treasury 1-3 Year Bond Index assesses U.S. Treasury issued debt. Only U.S. dollar denominated, fixed rate securities with minimum term to maturity greater than a year and less than or equal to three years are included. The fund charges 15 bps in fees (read: April ETF Asset Report: U.S. Equities & Treasuries Win).

Schwab Short-Term U.S. Treasury ETF SCHO

The underlying Bloomberg Barclays U.S 1-3 Year Treasury Bond Index includes all publicly-issued U.S. Treasury securities that have a remaining maturity of greater than or equal to one year and less than three years and are rated investment grade and have $250 million or more of outstanding face value. The fund charges 6 bps in fees (read: ETF Winners & Losers Post Fed Meet).

WisdomTree Bloomberg Floating Rate Treasury Fund USFR

The underlying Bloomberg US Treasury Floating Rate Bond Index is a rules-based, market value-weighted index engineered to measure the performance of floating rate U.S. Treasury bonds. The fund charges 15 bps in fees (read: Why Floating Rate Treasury Fund (USFR) is an Investor Favorite).

Vanguard Short-Term Treasury ETF VGSH

The underlying Bloomberg Barclays US Treasury 1-3 Year Bond Index includes fixed income securities issued by the U.S. Treasury all with maturities between one and three years. The fund charges 7 bps in fees.

iShares 0-5 Year TIPS Bond ETF STIP

The underlying Bloomberg Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (Series-L) comprises inflation-protected U.S. Treasury bonds with remaining maturities of less than five years. The product charges 6 bps in fees.

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iShares 0-5 Year TIPS Bond ETF (STIP): ETF Research Reports
 
iShares 1-3 Year Treasury Bond ETF (SHY): ETF Research Reports
 
Vanguard Short-Term Treasury ETF (VGSH): ETF Research Reports
 
Schwab Short-Term U.S. Treasury ETF (SCHO): ETF Research Reports
 
WisdomTree Floating Rate Treasury Fund (USFR): ETF Research Reports
 
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Zacks Investment Research
 
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