T-Bills vs T-Bill ETFs

Abstract

T-bills, bonds, and ETFs offer safety but differ in payouts, flexibility, and risk. Direct T-bills avoid management fees; ETFs offer liquidity for an expense ratio.

The following information is for educational purposes and does not constitute financial advice.

When it comes to safe, low-risk investing, U.S. Treasury bills (T-bills) are among the most trusted options.

Investors today have two main ways to invest:

• Buy a T-bill from the government or a brokerage and hold it until it matures.
• Buy an exchange-traded fund (ETF) that invests in T-bills.

While both options offer similar returns, the investor experience differs.

What Is a 6-Month T-Bill?

A 6-month T-bill is a short-term loan made to the U.S. government. When you buy one, you pay a reduced amount compared to its face value, for example, $974 for a $1,000 bill. Six months later, the government pays you back the full $1,000. That $26 difference is your return. We call this structure a “discount,” and it explains how T-bills work. Because you hold the T-bill from sale to maturity, your return is locked in from day one. If you buy a 6-month T-bill with an annual yield of 5.2%, the amount of money you will receive at maturity is $1000. The risk is selling early on the open market, where the price may fluctuate higher or lower based on current interest rates.

What Is a T-Bill ETF?

A T-bill ETF, such as SGOV or BIL, is a fund that rolls over near-term Treasury bills on your behalf. The fund doesn’t keep one T-bill until it matures. Instead, it often sells bills that are near maturity and buys new ones. You can buy or sell shares of this fund any day the stock market is open.

ETFs pay out the interest they generate to shareholders, usually in monthly dividends. This provides a monthly income stream and offers greater liquidity, allowing you to sell your shares at any time during trading hours. The ETF management charges an expense usually between 0.03% to 0.15% per year. With the expense ratio, the fund's net yield is lower than that of owning Treasury bills. It is important to understand that dividend yields already account for these costs.

The Return Difference

Let’s look at a simple example. Suppose 6-month T-bills offer an annual yield of 5.00%.

• Investing $10,000 in a T-bill requires you to hold it for six months. Your return is approximately $250, bringing your total to $10,250 at maturity. This results in an effective return of 2.50% over six months and incurs zero fees.
• Buying a T-bill ETF: The ETF targets the current T-bill yield (5%) but charges an annual expense of 0.12%. The net annualized return drops to about 4.88%. On a $10,000 investment, you'll earn roughly $244 in six months. This is $6 less than the six-month earnings from purchasing the T-bills outright. The ETF maintains this yield by rolling over a portfolio of bills. This management fee creates a lasting performance gap.

Within six months, the 0.12% fee seems negligible. Over a longer period, those fees add up. A consistent 0.12% drag will cost over $120 on a $10,000 investment over a decade.

Why Would Someone Choose One Over the Other?

Reasons to buy a T-bill:

• Buying T-bills avoids the ETF expense ratio, which allows you to achieve the best yield. If you sell early, market prices may fluctuate, resulting in a capital gain or loss. However, if you hold to maturity, you get the full face value without any fees.
• Specific date when you need the money back.
• Buy T-bills if you are comfortable using TreasuryDirect or a brokerage and do not need daily access to your funds.

Reasons to buy a T-bill ETF:

• Access your money anytime, without waiting for maturity.
• You enjoy the convenience of a brokerage account you already use.
• Prefer a monthly income rather than receiving interest as a lump sum at maturity.
• Invest smaller amounts and use automatic reinvestment.

Can a T-Bill ETF Lose Money?

A T-Bill ETF can lose money in a few ways, even though investors consider the T-bills themselves one of the safest investments in the world. When interest rates rise, the market value of existing T-bills declines. This happens because new bills provide better yields. If the ETF sells those older bills before they mature, it may receive less than their original sale price. Second, because ETFs trade on an exchange, the share price can drop below the fund's net asset value (NAV). Even if the underlying assets are healthy, you can sell your ETF shares at a loss if you exit at a disadvantageous moment. These risks are small compared to owning stocks or long-term bonds, but they are real. It's important to understand them before thinking a T-bill ETF is risk-free.

Finally

Both options are generally safe. The U.S. government backs them. Yes, the Constitution says the public debt is backed by the US taxpayer. The direct T-bill offers a higher return, since you avoid all fees. The ETF wins on flexibility. The choice comes down to you: if you value every basis point of return and can manage the reinvestment yourself, go direct. If you value simplicity or need liquidity, an ETF is a better choice.

This information is for educational purposes only and does not constitute financial advice.

References:

• https://treasurydirect.gov
• https://www.ncsl.org/state-legislatures-news/details/the-debt-ceiling-and-the-14th-amendment-the-jury-is-still-out
• https://www.kiplinger.com/investing/etfs/best-weekly-income-etfs
• https://treasurydirect.gov/marketable-securities/understanding-pricing/
• https://stockanalysis.com/etf/tbil/
• https://pomegra.io/learn/library/track-d-other-assets/bonds/chapter-10-bond-funds-and-etfs/bond-funds-and-rising-rates
• https://www.sciencedirect.com/science/article/abs/pii/S0148619514000782

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