Short-Term Treasury ETFs Outperform Money-Market Funds: Here's a Ranking
Examining the Market's Best for Brokers: Avoid Overpricing - Your Handy Guide
Some investors are disgruntled with brokerage firms' money-market funds, contending that they are overpriced. Instead of complaining, savvy investors can take a proactive approach by opting for low-cost short-term Treasury ETFs. This guide provides a sortable list of the best options available.
Brokerage firms provide a multitude of services for free, including custody, trading, and research. As one might expect, they need to cover their costs. To minimize the burden on customers, investors can maximize the yield from their cash by utilizing low-cost short-term Treasury ETFs.
A successful low-cost portfolio management strategy consists of two components:
- Minimizing high management fees on transaction accounts, which are primarily used for paying bills, receiving direct deposits, and settling securities trades.
- Swapping excess cash in and out of a separate investment with a low management fee.
For example, a transaction account might hold $10,000 most of the time, with larger balances only when necessary. In contrast, a low-fee account could have $100,000 more frequently.
If you conduct business with Vanguard, the low-fee account could be a Vanguard mutual fund. Elsewhere, investors may need to get creative, as the money market fund offered by many brokerages is pricey. In such cases, investors can buy shares in an exchange-traded fund (ETF) that behaves like a money market fund but has a much lower expense ratio.
To avoid depleting the transaction account, investors should monitor its balance and sell some ETF shares (or Vanguard fund shares) a day ahead to feed the account when necessary. Once the trade settles the next day, cash can be moved into the transaction account.
In some cases, investors might manage three separate pots of money: a brokerage account for ETFs and other shares, a settlement fund handling proceeds from stock sales, and a cash management account for everyday banking. This separation is unfortunate but necessary to ensure a favorable yield.
Not even Vanguard is immune from this practice, as their cash management account boasts a high yield. Given that Treasury bills currently offer a higher yield, it appears that Vanguard, like other brokers, hopes that investors will not have the patience for the transfers and leave idle cash in places with higher management fees.
For those interested in optimizing their portfolio, Vanguard offers several low-cost money-market mutual funds. However, non-Vanguard customers must rely on ETFs to manage large cash balances. Here are the top options:
Bear in mind that ETFs incur bid/ask spreads, which can be as high as a penny or two per share, while trading costs may be considerably less consequential than management fees.
Ultimately, investors should be wary of common misconceptions surrounding cash management, such as the bucket strategy, the rainy-day kitty, and the dry-powder notion. Each of these fallacies can lead to holding an excess of cash, which significantly reduces an investor's potential returns.
Criteria for Selecting Short-Term Treasury ETFs
- Low Expense Ratios: Minimizes costs, particularly crucial for large cash balances
- Liquidity: High Assets Under Management (AUM) ensures easy entry and exit at market prices
- Short-Term Maturity: Minimizes interest rate risk compared to longer-duration bonds
- Credit Quality: U.S. Treasury ETFs carry minimal credit risk
Leading Short-Term Treasury ETFs
Based on current market data, the following short-term Treasury ETFs stand out:
| ETF Name | Ticker | Expense Ratio | AUM (approx.) | Yield (approx.) | Maturity Focus ||------------------|---------|---------------|---------------|------------------|---------------------|| Vanguard Short-Term Treasury ETF | VGSH | 0.03% | ~$10–15B | 3.9–4.1% | 1–3 Years || iShares 1-3 Year Treasury Bond ETF | SHY | 0.15% | ~$24B | 3.8% | 1–3 Years || iShares 0-3 Month Treasury Bond ETF | SGOV | 0.07% | ~$10–15B | ~4.9% | 0–3 Months || SPDR Bloomberg 1-3 Month T-Bill ETF | BIL | 0.135% | ~$20B | ~4.8% | 1–3 Months |
Investors can optimize their personal-finance and investment strategies by considering low-cost short-term Treasury ETFs like the Vanguard Short-Term Treasury ETF (VGSH) or the iShares 1-3 Year Treasury Bond ETF (SHY), instead of brokerage firms' money-market funds. When managing large cash balances, selecting ETFs with low expense ratios, high liquidity, short-term maturity, and minimal credit risk is crucial.
