Replace Your Savings Account and CDs With These Low-Risk ETFs

Treasury bill ETFs

Treasury bills, often referred to as T-bills, represent the short end of the yield curve, with issuances ranging from a few weeks to up to a year. Typically, T-bill yields move in close step with prevailing interest rates, making them a reliable indicator of economic trends.

Unlike longer-term Treasury securities, T-bills do not pay a semi-annual coupon. Instead, they are issued at a discount to their par value, and investors receive the full par value at maturity; the difference between the purchase price and the par value is the interest earned.

For those looking to avoid the complexities and user interface challenges of TreasuryDirect, the government’s platform for buying individual securities, accessing T-bills via an ETF offers an alternative.

When bundled into an ETF, T-bills can be traded on an exchange just like a regular stock, simplifying the investment process. The ETF takes on the work of selecting and rolling over T-bill issues. Additionally, investors benefit from monthly distributions that are exempt from state and local income taxes.

The share price of T-bill ETFs usually displays a saw-tooth pattern; it gradually increases over the course of the month as interest accrues and then drops on the ex-distribution date. These ETFs also tend to have very low bid-ask spreads, reflecting the high liquidity of the underlying T-bills.

Here are some notable T-bill ETFs along with their expense ratios and 30-day SEC yields as of October 24:

• SPDR Bloomberg 1-3 Month T-Bill ETF
  BIL
  +0%
  : This ETF has an expense ratio of 0.1356% and a 30-day SEC yield of 4.7%.
• iShares 0-3 Month Treasury Bond ETF
  SGOV
  : It offers a slightly lower expense ratio of 0.09% and a 30-day SEC yield of 4.9%.
• Global X 1-3 Month T-Bill ETF
  CLIP
  +0.02%
  : This option has the lowest expense ratio at 0.07% and the highest yield among the group at 5.05%.

Ultra-short bond ETFs

If you’re willing to take on a bit more credit risk, ultra-short bond ETFs offer the opportunity to earn more competitive yields. These ETFs typically include Treasury bills but also enhance their portfolios with corporate-issued securities such as asset-backed bonds, commercial paper, and promissory notes.

The trade-off compared to Treasury-only portfolios is clear: while ultra-short bond ETFs generally offer higher yields, they also come with greater credit risk and lower tax efficiency.

The price chart for these ETFs usually exhibits the familiar saw-tooth pattern, climaxing just before the ex-distribution date, but they can be slightly more volatile than T-bills.

For example, during significant market events like the March 2020 COVID crash, the price of some of these ETFs can momentarily fall below NAV.

Most popular ultra-short bond ETFs are actively managed rather than index-tracking. This active management approach is noteworthy because, despite the complexity and potential risks, these ETFs are among the cheapest in the actively managed segment, which can significantly benefit investors.

Here are some notable ultra-short bond ETFs, along with their expense ratios and 30-day SEC yields as of October 24:

• Schwab Ultra-Short Income ETF
  SCUS
  +0%
  : This ETF has an expense ratio of 0.14% and a 30-day SEC yield of 4.63%.
• JPMorgan Ultra-Short Income ETF
  JPST
  -0.02%
  : It features a slightly higher expense ratio of 0.18% but offers a more competitive 30-day SEC yield of 4.90%.
• PGIM Ultra Short Bond ETF
  PULS
  -0.04%
  : With an expense ratio of 0.15% and a 30-day SEC yield of 4.83%, this ETF is also a competitive choice in the ultra-short category.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.