When a Short-Term Treasury ETF Makes Sense for Your Cash

Short-term treasury funds can be a good place to park cash, but the use cases are important to understand when trying to determine when they might be appropriate. Let’s dig in.

What is a Short-Term Treasury ETF?

First, let’s outline what a Treasury ETF is. According to Investopedia, a Treasury ETF is an “ETF that holds a basket of U.S. Treasury securities, each with different yields, durations, and interest payments in their portfolios.”

For the purposes of this breakdown, I will be focusing on the benefits of short-term funds holding baskets of Treasury securities that are maturing in less than a year, commonly in the 0–3 month range.  

Benefits

Here are some of the key benefits:

• Receive monthly interest income
• Preserve capital
• Liquidity – you could sell the Treasury ETF and receive your initial capital investment back quickly (approximately the same amount, since the Net Asset Value may differ slightly)

What About a High-Yield Savings Account?

Now, you may be wondering why you wouldn’t just keep funds in a High-Yield Savings Account (HYSA)?

First, you may be able to earn a higher yield (more interest) than what you receive on cash in the savings account. You would want to compare the yield currently offered by your bank and compare it to the yield offered by the Treasury ETF.

Second, you may be seeking higher yield on cash currently held in a brokerage account, since brokerage firms don’t typically pay much interest. Treasury funds can be a good solution. Perhaps you are holding cash opportunistically and are seeking to take advantage of any market downturn. Treasury ETFs would allow you to maintain liquidity, preserve capital, and earn a higher yield (in a higher interest-rate environment) while you wait.

Of course, a HYSA plays an integral role in sound personal finance, and you’d want to continue to maintain emergency funds in that savings account. You would simply leverage Treasury ETFs when they make sense for you.