By Andrew Bary
Treasury bills have rarely been more attractive, and exchange-traded funds make owning them easier than ever.
Investors have been warming to Treasury bills -- government bonds maturing in less than a year -- which offer security and ample yields now above 4%. That yield is roughly double the current 2% inflation rate, one of the wider gaps of the past 20 years. They also yield nearly as much as 10-year Treasuries, at 4.35%, and don't carry the price risk of the 10-year notes.
Berkshire Hathaway CEO Warren Buffett has long stashed the bulk of the company's ample cash reserves in Treasury bills because they're the safest short-term bond investments. Berkshire now holds over $300 billion of Treasury bills, or about 5% of the entire $6 trillion market. Retail investors are also getting in on the act: Noncompetitive bids at Treasury auctions, a reflection of retail demand, are running at about $15 billion a month.
Reflecting the boom in fixed-income exchange-traded funds, Treasury-bill ETFs are rapidly gaining in popularity and challenging money-market funds and bank deposits as a place for retail investors to park cash. T-bill ETFs now hold over $100 billion in assets, but are dwarfed by money-market funds, which have $7 trillion in assets.
The two largest are the $48 billion iShares 0-3 Month Treasury Bond ETF, which launched in 2020, and the $44 billion SPDR Bloomberg 1-3 Month T-Bill ETF, which has been around since 2007. Vanguard entered the market in early 2025 with the Vanguard Ultra-Short Treasury ETF, which has an annual fee of just 0.07%, against 0.09% for the iShares ETF and 0.14% for the SPDR ETF. They yield in the 4.2% to 4.3% range. The iShares ETF has attracted $18 billion of inflows so far this year, the most of any bond ETF.
Unlike Treasury notes and bonds, which pay semiannual interest and principal at maturity, T-bills are sold at a discount to their face value of $100, or 100 cents on the dollar, and the interest payment is the difference between the purchase price and face value. If an investor buys a three-month T-bill paying 4%, the purchase price would be around $99, with the investor getting $100 at maturity.
Investors can buy Treasury bills directly through the Treasury.gov website. The government sells four-week, eight-week, 13-week, 17-week, and 26-week Treasury bills at the weekly auctions. The 52-week bill is auctioned every month. With a noncompetitive bid, investors agree to accept the average yield set by institutional holders. There is a limit of $10 million of noncompetitive bids per auction -- enough to cover nearly all investors.
Investors can also participate in T-bill and other Treasury debt auctions through banks and brokers. At Fidelity, there is no charge for retail investors to place noncompetitive bids online, and the firm offers an "auto roll" feature that allows investors to automatically reinvest the proceeds of maturing T-bills in new securities.
The T-bill ETFs, however, offer advantages over buying direct, including simplicity, a diversified pool of securities, monthly income, and ready liquidity on the NYSE or Nasdaq. One benefit over money-market funds is taxes. Interest on T-bills is exempt from state and local taxes, a nice plus for investors in states like New York and California where income-tax rates can top 10%. CD interest is subject to state and local taxes, as is much or all income from money funds, including many popular "government" funds.
In fact, some big government money-market funds, including the $399 billion Fidelity Government Money Market fund and $354 billion Vanguard Federal Money Market fund, don't hold a lot of actual U.S. Treasuries. The Fidelity money fund, for instance, has over half its assets in repurchase agreements, which are short-term loans secured by Treasuries or federal agency securities. Repos, as they are known, are very safe, but they're not Treasuries and interest on them isn't exempt from state and local taxes.
And then there are fees. While the T-bill ETFs have fees of about 0.1% annually, the Fidelity Government Money Market fund charges 0.42% for the largest class shares, while the $369 billion Schwab Prime Advantage Money fund charges 0.34%. The Vanguard Federal Money Market fund charges only 0.11% annually.
The fee gap can be significant. For someone with $1 million, a T-bill ETF would offer $2,000 to $3,000 in added income a year plus tax benefits for those in high-tax states depending on the money fund share class.
Unlike money-market funds, which are sold at a fixed price of $1, T-bill ETFs trade like stocks on an exchange. Their prices rise each month as the underlying T-bills accrete interest and then drop when they pay monthly dividends. This can result in small gains or losses when they are sold. Still, they are very liquid -- the iShares and SPDR ETFs trade with penny spreads between bid and ask prices and have $1 billion of average daily volume. "You can do huge trades of $200 million to $300 million with tight execution," says Dhruv Nagrath, director of fixed-income strategy at BlackRock.
The biggest risk might be one that every T-bill owner faces, regardless of whether they use money-market funds, the ETFs, or actual securities: lower interest rates. That would force investors to reinvest their money at lower rates. T-bill rates are already down a percentage point in the past year, and the markets are now anticipating another half-point cut by year-end.
That would still leave T-bill rates at nearly 4%, and Matthew Bartolini, head of ETF research at State Street Advisors, which manages the SPDR fund, doesn't expect them to fall dramatically. And with the Federal Reserve in wait-and-see mode, they could be higher for longer.
It's a great time for "T-bill and chill," and ETFs are an ideal way to do it.
Write to Andrew Bary at andrew.bary@barrons.com
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June 13, 2025 11:35 ET (15:35 GMT)
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