Ultrasafe investments, like short-term Treasuries, are an effective way to diversify an all-stock portfolio as they tend to hold up well during periods of market distress. Treasuries are backed by the full faith and credit of the U.S. government, so they don’t carry the credit risk that is embedded in corporate bonds. Those with relatively shorter maturities are less sensitive to changes in interest rates than their longer-maturity counterparts. But this high degree of safety means they won’t provide exceptional returns. So, keeping costs low is an important consideration when choosing a Treasury fund. Schwab Short-Term U.S. Treasury ETF (SCHO) provides great exposure to these stable assets. Its strong index-tracking record and rock-bottom price tag support a Morningstar Analyst Rating of Silver.
This exchange-traded fund tracks the Bloomberg Barclays U.S. Treasury 1-3 Year Index, which includes Treasury bonds with one to three years remaining to maturity. Indexing Treasuries in this way is a sound approach for exposure to a specific portion of the yield curve. It is difficult for active managers to recoup their fees while offering comparable exposure to Treasuries on this narrow segment of the yield curve, as Treasuries are one of the most competitively priced areas of the bond market and managers have little leeway to take additional duration risk. And they can’t take additional credit risk without venturing into other areas of the market. Active Treasury bond managers derive most of their active returns from yield-curve positioning. Those strategies, or broader Treasury index funds, may be more suitable for those who don’t have a view about the best place to be on the yield curve.
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Daniel Sotiroff does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.