Investing: Are Any Treasury ETFs Really Safe? (BIL, SHV, SHY, GLD, IAU)

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July 21, 2011 11:26am NASDAQ:VGSH NYSE:BIL

Ron Rowland:  Your heroes in Washington D.C. are locking horns about the government debt. If they don’t reach a deal very soon, the Treasury may have to stop borrowing money next month.


This is, of course, exactly what the Treasury should have done a long time ago, in my opinion. The national debt is out of control. Instead of making tough decisions, Congress and the White House have stalled for decades. They can’t do this forever — which is why Weiss Ratings downgraded U.S. government debt from C to C-minus last week.

I don’t know how it will all end. But here’s what I do know: If you own Treasury ETFs, you’re on the wrong end of a potentially bad loan. We can no longer assume that U.S. government debt carries no credit risk.

They get a C-minus.
They get a C-minus.

On the other hand, what are the alternatives? Exactly what else are you supposed to do with your cash? We don’t have many good choices.

Last week I told you how to use duration to assess the risk of rising interest rates. As I said, credit risk is different. There is a connection, though. Smart lenders keep risky borrowers on a tight leash — the tighter the better.

If you must loan your money to a shady character, then you at least want to get your cash back as soon as possible. You do this by keeping your maturity and duration short.

I totally agree with Martin’s latest assessment: Avoid medium- and long-term U.S. government securities. That includes Treasury ETFs with average duration of more than 1-3 years. And you probably ought to stay on the shorter end of that scale.

Even short-term Treasury ETFs aren’t free of credit risk or interest rate risk. And the yields aren’t exactly impressive, either. But conservative investors should take a look, anyway.

What Is “Short-Term?”

This may seem like a simple question, but it’s an important one. Treasury securities are issued with maturities as short as three months and as long as thirty years — plus various points in between.

ETF sponsors know investors usually want to stick with one part of the yield curve. I like the way iShares breaks it down. They have six Treasury bond ETFs. The most conservative, SHV, keeps its portfolio maturity at one year or less. Their other five offerings cover ranges of 1-3 years, 3-7 years, 7-10 years, 10-20 years, and 20+ years.

Some people would disagree with me on this, but I think it’s fair to describe bonds maturing in three years or less as “short-term.” A stricter definition might include only maturities of one year or less. Whichever definition you chose, you can use ETFs to match your investments to your desired time frame.

Six Short-Term Treasury ETFs

As we saw last week, short-term Treasury ETFs are yielding next to nothing. However, in the current environment, we’re not buying them for income, we’re buying them for relative safety. Here are six ETFs that you may want to consider:

  • SPDR 1-3 Month T-Bill Fund (NYSE:BIL)
  • Schwab Short-Term U.S. Treasury ETF (NYSE:SCHO)
  • iShares Short-Term Treasury Bond Fund (NYSE:SHV)
  • Vanguard Short-Term Government Bond Index Fund (NYSE:VGSH)
  • iShares 1-3 Year Treasury Bond Fund (NYSE:SHY)
  • PIMCO 1-3 Year Treasury ETF (NYSE:TUZ)

A few of these ETFs are eligible for commission-free trading at various brokerages (SCHO at Schwab, SHY at Ameritrade, and VGSH at Vanguard). Contact your broker for details.

Should You Hedge Your Treasury ETFs?

Treasury ETFs of any category are, of course, indirectly tied to the fate of the U.S. dollar. The negative impact of a falling greenback may not be readily apparent, but it’s still there. Hence you may also want to consider hedging your currency exposure.

Gold is the ultimate currency hedge.
Gold is the ultimate currency hedge.

 

A good way to do this is with a gold bullion ETF — one based on the actual metal, not shares of mining companies. Gold is likely to move up quickly in any weak-dollar scenario, so having a small slice in a gold ETF is a good insurance policy.

SPDR Gold (NYSE:GLD) was the original gold ETF and is still the largest. iShares Gold (NYSE:IAU) is also a good choice. One handy thing about IAU is that each share represents 1/100 ounce of gold. GLD shares are tied to 1/10 ounce. Therefore, investors may find it easier to get the precise allocation they want with IAU.

I sincerely hope Washington gets its act together and the U.S. avoids default. Meanwhile, now is a good time to review your Treasury holdings and possibly shift your exposure to the short end. The ETFs I named above can help you do it.

Best wishes,

Written By Ron Rowland From Money And Markets

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.


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