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BIL, SHV: Guaranteed Zero Returns

ETF investors, roiled by the market, have been piling into the safest of safe Treasury funds recently. In the last month, $1.1 billion has flowed into the SPDRS Barclays Capital 1-3 Month T-Bill ETF (NYSEArca:BIL) and $600.5 million into the iShares Barclays 1-3 Year Treasury Bond Fund (NYSEArca:SHY), while $121.3 million flowed out of the iShares Short Treasury Bond Fund (NYSEArca:SHV), which invests in Treasurys maturing in 12 months or less.

Together, these funds have over $15 billion in assets under management.

I don’t understand why.

I understand that investors are looking for safety in very uncertain market conditions, but using BIL or SHV as a safe haven is the equivalent of still paying your bank to have a checking account. Sure, some people still do it, but plenty of better alternative options exist.First, the numbers. Short-term Treasury yields have been at or near zero for some time. The Federal Reserve says they will stay that way at least through the middle of 2013. That translates into near-zero returns on funds like BIL and SHV. In fact, as it stands currently, the dividend yield on BIL is zero. Zip. Zilch. Nada.

If demand for short-term Treasurys continues, investors will be, at best, standing still in these funds. When you account for trading costs and spreads, investors are likely paying for the privilege to hold Treasurys. In this case, individual investors would be better off holding their money in FDIC-insured savings accounts.

Investors who wish to park on the sidelines sums exceeding the FDIC insurable limit still have a number of options.

Inflation concerns appear to have been reignited by the reported increase in CPI. The concern is that a spike in inflation will push nominal interest rates—a real and reasonable concern that has many investors avoiding longer maturities. There are, however, two Treasury inflation-protected securities ( TIPS ) funds that may alleviate those concerns.

The Pimco 1-5 Year U.S TIPS Index Fund (NYSEArca:STPZ) and the iShares Barclays 0-5 Year TIPS Bond Fund (NYSEArca:STIP) both provide inflation-protected exposure for investors. Although both funds reach much further down the maturity spectrum than BIL or SHV, the additional yield compensates investors for adverse movements in interest rates, especially if they are expected to come from inflation.

Because STIP includes TIPS maturing in less than a year, it has almost half the duration of STPZ. As such, it has lower interest rate sensitivity.

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Another option is the Pimco Enhanced Short Maturity Strategy Fund (NYSEArca:MINT). For investors disillusioned with Treasurys and looking for alternative ultra-short-term investment, MINT may well serve a purpose. Here at IndexUniverse, MINT has its supporters and detractors, but it should at least be considered in this conversation.

MINT comes with its own issues that must be considered. The fund is actively managed to outperform money market funds. The fund managers select investment-grade securities, both domestic and foreign, of varying maturities. The fund, however, maintains a low duration, keeping its interest rate risk low. It charges a higher expense ratio than BIL or SHV, at 35 basis points.

Nevertheless, it remains the only other investment-grade option within all ETFs with low duration. Considering the similar durations of SHV and MINT, MINT’s yield is substantially higher. Furthermore, since its inception, MINT has dramatically outperformed SHV, while remaining uncorrelated with other major asset classes.

Ticker Fund Name AUM($, MM) 30 Day SEC Yield Duration Expense Ratio
BIL SPDRS Barclays Capital 1-3 Month T-Bill ETF 2,026.6 0.08% 0.12 0.13%
SHV iShares Barclays Short Treasury Bond Fund 4,310.6 0.00% 0.40 0.15%
SHY iShares Barclays Short 1-3 Year Treasury Bond Fund 9,009.0 0.16% 1.80 0.15%
STIP iShares Barclays Short 0-5 Year TIPS Bond Fund 193.2 1.39% 1.30 0.20%
STPZ PIMCO 1-5 Year U.S. TIPS Index Fund 1,217.6 1.53% 2.50 0.20%
MINT PIMCO Enhanced Short Maturity Strategy Fund 1,350.8 0.81% 0.63 0.35%

Sources:Issuers

MNT SHV
PIMCO Enhanced Short Maturity Strategy ( MINT ) 1 0.091
iShares Barclays Short Treasury Bond ( SHV ) 0.091 1
iShares Barclays Aggregate Bond ( AGG ) 0.526 0.2
SPDR S&P 500 ( SPY ) -0.15 0.026
iShares MSCI ACWI (ACWI) -0.091 0.029
SPDR Barclays Capital International Treasury Bond (BWX) 0.101 0.038
(Daily Correlation:11/19/2009 to 8/18/2011)

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Given the current interest rate and market environment, investors must consider all their options for safe-keeping their money. BIL and SHV may be the safest of the safe, but there are interesting options just a smidge further out the curve.

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2011 IndexUniverse LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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