10-Year Treasury Yield Hits 5%: Which Bond ETFs Offer the Most Direct Exposure?

BondBloxx Bloomberg Ten Year Target Duration US Treasury ETF

XTEN

-0.13%

XTEN is the first place I'd look for investors who want something more precise than IEF without narrowing their exposure all the way down to a single Treasury issue. It has over $1 billion in assets under management and tracks the Bloomberg U.S. Treasury 10 Year Duration Index.

The important word here is "duration."  Unlike IEF, which targets Treasury securities based primarily on a seven- to 10-year maturity range, XTEN constructs its portfolio to maintain approximately 10 years of interest-rate sensitivity.

That's why the actual maturities can extend further out. More than 59% of XTEN's portfolio currently consists of Treasuries with maturities beyond 10 years, with roughly another 40% in the seven- to 10-year bucket. Together, that produces an average duration of 9.86 years.

In practical terms, a one-percentage-point increase in interest rates would theoretically translate into roughly a 9.86% decline in price, all else being equal, while a one-point decline would have approximately the opposite effect. That makes XTEN a relatively clean way to express a view on the part of the yield curve around the 10-year duration point.

As of August 31, XTEN had a 4.88% 30-day SEC yield and a 5.19% yield to maturity. Given the subsequent increase in Treasury yields, I'd expect the SEC yield to move higher as newer data rolls through, although the exact figure will depend on the portfolio and prevailing market conditions.

I also prefer XTEN to IEF on cost. XTEN charges a 0.075% expense ratio, exactly half of IEF's 0.15%. For investors specifically trying to target approximately 10 years of Treasury duration rather than a broader seven- to 10-year maturity bucket, I think XTEN provides the cleaner exposure at the lower price.

iShares iBonds Dec 2036 Term Treasury ETF

IBTR

IBTR approaches the problem differently. Rather than maintaining a constant duration target, IBTR tracks the ICE 2036 Maturity U.S. Treasury Index and currently holds just four Treasury securities. The ETF itself is designed to terminate in December 2036, just under 10 years from now.  

As its underlying bonds approach maturity, the portfolio's duration should progressively decline. Eventually, the securities mature, the ETF winds down, and shareholders receive their portion of the remaining net assets. That makes IBTR more analogous to buying and holding a roughly 10-year Treasury portfolio to maturity than maintaining constant exposure to the 10-year point on the yield curve.

You still get the conveniences of an ETF in the meantime, including intraday trading, diversification across several Treasury issues and regular distributions. It's also remarkably inexpensive and liquid for such a targeted product. IBTR charges a 0.07% expense ratio and currently has a bid-ask spread of approximately 0.04%. As of September 16, its 30-day SEC yield was 4.79%.

XTEN continually targets roughly 10 years of duration, while IBTR effectively counts down toward maturity. That makes IBTR particularly interesting as a buy-and-hold solution for investors who have a liability, spending goal or other need for capital around 2036, rather than someone who wants to maintain a permanent tactical bet on the 10-year Treasury.

F/m US Treasury 10 Year Note ETF

UTEN

For the most precise exposure of the three, my preferred option is UTEN.  UTEN does something refreshingly simple: it holds the current "on-the-run" 10-year U.S. Treasury note.

On-the-run simply means the Treasury security most recently issued for a particular maturity. It's generally the issue traders are referring to when discussing the current 10-year Treasury and tends to be among the most actively traded securities at that point on the curve.

Normally, an investor trying to maintain that exposure directly would eventually have to sell an aging Treasury note and purchase the newly issued 10-year note. UTEN handles that rolling process automatically, continually moving into the newest on-the-run issue so investors can maintain targeted exposure without managing individual Treasury auctions themselves.

There's also a cash-flow convenience. Individual Treasury notes generally pay interest semi-annually, whereas UTEN makes distributions monthly, providing a more frequent income stream without materially changing the underlying source of that income.

After its 0.15% expense ratio, UTEN had a 4.61% 30-day SEC yield as of August 31. Given the subsequent rise in the 10-year Treasury yield, I'd expect that figure to be revised higher as newer portfolio data becomes available. The ETF is also quite liquid, with a bid-ask spread of roughly 0.02%.

For investors specifically trying to express a current view on the 10-year Treasury, this is the most direct ETF implementation of the three. XTEN targets approximately 10 years of duration across a portfolio of Treasuries, while IBTR owns securities maturing around a specific calendar year. UTEN simply keeps owning the newest 10-year Treasury note and rolls it for you.

Please note that this article reflects the author’s personal views and does not represent the opinions of the publication or its affiliates. It is for informational purposes only and does not constitute investment advice. It is essential to seek guidance from a registered financial professional before making any investment decisions.