Vanguard recently launched a Treasury ETF that could potentially be an attractive option for short-term capital.
VBIL
VBIL is Vanguard’s 0–3 Month Treasury Bill ETF. The fund holds Treasury Bills:
The expense ratio of this fund is 0.07%, and the current SEC yield is 4.25%.
This fund is not a good holding for the long term but is designed for investors looking to earn a small percentage yield on their short-term funds.
Difference between other funds
One of the reasons Vanguard launched this fund is to compete against other ETF products, like SGOV, a 0–3 month Treasury bond ETF.
The SGOV fund has a 0.09% expense ratio vs. the 0.07% expense ratio of VBIL, so the yield will generally be higher for VBIL, and Vanguard is trying to capture this audience.
Difference between Vanguard’s Treasury MMF
You may have heard about Vanguard’s Treasury Money Market Fund (VUSXX).
The money market fund also holds Treasury bills and tries to maintain the NAV at $1.
Some of the differences are:
- You can buy VBIL at almost all brokerages (like Fidelity or Schwab), but you can’t buy VUSXX. I know many friends reading this newsletter use Fidelity and couldn’t buy VUSXX, so they had to use Fidelity’s money market funds with 0.42% expense ratios (like FDLXX). VBIL would allow them to increase their yield due to lower costs.
- VUSXX has a $3,000 minimum investment, while VBIL has none.
- VUSXX is a mutual fund, while VBIL is an ETF.
- The price of VBIL can fluctuate, while VUSXX tries to maintain an NAV of $1 (though it can still technically “break the buck”), which could also mean having to report capital gains on your taxes if sold.
Why Treasury bills?
Treasury bills are U.S. government debt backed by the Treasury.
They are one of the best ways to obtain the highest yield without having to switch across multiple HYSA banks.
Note: You don’t have to buy Treasury bills through an ETF or MMF. You can buy them directly from TreasuryDirect.gov to avoid expense ratios. Just make sure to understand the liquidity concerns and the implications of selling before maturity.
Taxes
The big benefit of T-bills is that the “interest” is exempt from state and local tax.
So, if you have a bank paying 4% and a Treasury paying 4%, you will generally be better off with T-bills from a tax standpoint.
For example, say you earn $2,000 in interest from your HYSA or Treasury and have a 5% flat state tax rate:
With an HYSA, you will pay $2,000 × 0.05 = $100 in state taxes.
With Treasury bills, you will not pay state tax, saving you $100 in this case.
Risks
If you hold your savings in a bank account, they are protected by the FDIC.
If you hold T-bills, they are backed by the Treasury.
If you buy a T-bill ETF (like VBIL) or a Treasury MMF, they have some risks.
In particular, for a T-bill ETF, since it’s bought and sold on the secondary market, there may be times when the market price and the NAV differ significantly.
In addition, the value of U.S. government securities may be impacted by changes in the financial condition, credit rating, or policies of the U.S. government.
Before investing in Treasury ETFs, you should read through the VBIL prospectus to understand the risks.
Overall
Don’t let banks pay you just 0.01% interest on your money. There are plenty of options that can give you a 4% yield on your savings and emergency funds.
See you next week.
MC, CPA