The United States Spends $2.9 Billion a Day on Interest and These ETFs Let You Get a Piece of It

The United States Spends $2.9 Billion a Day on Interest and These ETFs Let You Get a Piece of It

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The U.S. national debt is a hot topic as the government continues to spend more than it earns. With debt currently at $34 trillion, interest payments alone eat up a significant portion of the budget. In fact, the United States spends a whopping $2.9 billion a day on interest, according to recent data. This astronomical figure is directly linked to the current high interest rate environment, with the Federal Reserve signaling that rates will stay high for longer to combat inflation.

While the government issues Treasury bills, bonds and notes to finance its debt, it is investors who receive these large interest payments. While some may view the skyrocketing national debt as a cause for concern, savvy investors see it as an opportunity to generate income in their portfolios.

Treasury ETFs to Consider

For retail investors looking to capitalize on high interest rates and earn a piece of the billions in daily payments, Treasury ETFs offer a simple and accessible solution. These ETFs hold a basket of U.S. Treasury securities, providing exposure to various maturities and strategies. Here are four Treasury ETFs to consider, each with a unique approach:

Schwab Short-Term U.S. Treasury ETF (SCHO)

The Schwab Short-Term US Treasury ETF tracks the total return of the short-term US Treasury bond market, focusing on securities with remaining maturities between 1 and 3 years. This ETF is an excellent choice for investors who prioritize capital preservation and liquidity.

With an ultra-low expense ratio of just 0.03%, SCHO is one of the most cost-effective options in its category. The fund’s short-term orientation results in lower interest rate risk than mid- and long-term Treasury ETFs. However, this also means that returns may be lower than those of longer duration securities.

Vanguard Mid-Term Cash ETF (VGIT)

For investors seeking a balance between yield and interest rate risk, the Vanguard Intermediate-Term Treasury ETF is a compelling choice. VGIT tracks the Bloomberg US Treasury 3-10 Year Bond Index, providing exposure to US Treasury securities with remaining maturities between 3 and 10 years.

The ETF’s medium-term orientation offers the potential for higher returns than short-term funds like SCHO. It is important to note, however, that this comes with increased interest rate risk, as medium-term bond prices are more sensitive to changes in interest rates. VGIT’s expense ratio of 0.04% is very competitive, ensuring that more of the fund’s returns end up in investors’ pockets.

The story continues

iShares 20+ Year Treasury Bond ETF (TLT)

For those willing to take on more interest rate risk in exchange for potentially higher returns, the iShares 20+ Year Treasury Bond ETF is worth considering. TLT tracks an index composed of U.S. Treasury bonds with a remaining maturity of more than 20 years, providing targeted exposure to the long end of the yield curve.

The ETF’s long duration makes it very sensitive to interest rate fluctuations, meaning prices can be more volatile than funds with shorter durations. However, TLT also offers the highest potential return among the ETFs discussed here. Additionally, long-term Treasury bonds can serve as a hedge against inflation because their prices tend to rise when inflation expectations decline.

iShares Core US Aggregate Bond ETF (AGG)

Investors looking for a more diversified approach to fixed income investing should consider the iShares Core US Aggregate Bond ETF. AGG tracks the Bloomberg US Aggregate Bond Index, providing broad exposure to the US investment grade bond market, including Treasuries, corporate bonds and mortgage-backed securities.

Although AGG is not a Treasury-only ETF, the fund’s significant allocation to government bonds means it still provides exposure to the high interest rate environment. Diversifying the ETF across bond sectors and issuers can help mitigate risk, but it is important to note that the inclusion of corporate bonds adds credit risk compared to a portfolio consisting only of collateralized securities by the government.

Things to consider

When deciding which cash ETF to invest in, there are a few key factors to keep in mind:

Your financial goals: Do you prioritize current income, capital preservation, or a balance of the two? Your answer will help determine which maturity range and ETF strategy best fits your goals.

Your risk tolerance: While all Treasury ETFs provide exposure to high-quality government bonds, those with longer durations carry increased interest rate risk. Be sure to assess your comfort level with potential price fluctuations before investing.

Expense ratios: Although the ETFs discussed here all have low expense ratios, even small differences in fees can add up over time. Consider the impact of expenses on your total returns when making your selection.

As the U.S. government spends billions per day on interest payments, Treasury ETFs offer investors a way to profit from the current high-rate environment. By providing exposure to various segments of the Treasury market, these funds can help income-oriented investors take advantage of the government’s high level of spending.

However, it is important to remember that while Treasury ETFs can play a valuable role in a diversified portfolio, they may offer less total return potential than stock ETFs over the long term. As with any investment decision, it is essential to consider your individual situation, including your risk tolerance, time horizon and overall financial plan. You should consult a financial advisor to help you determine whether Treasury ETFs are right for your situation.

Investors should also keep in mind that the ETF structure has its own set of considerations, such as trading costs and potential premiums or discounts to net asset value. Additionally, the tax implications of investing in Treasury ETFs may vary depending on your situation.

Ultimately, by understanding the unique characteristics and risks associated with each Treasury ETF, investors can make informed decisions and potentially benefit from the billions in daily interest payments made by the U.S. government to bondholders.

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