SGOV vs VMRXX vs US Treasuries

[peter95]

Hi, did someone do a math to see if it makes sense to manage the own portfolio of short term US Treasury Bills with automatic roll-up vs owning SGOV vs VMRXX.

• SGOV owns 1-3 months US Treasuries, current Unsubsidized 30-Day SEC Yield as of Apr 11, 2024 5.24%, expense ratio 0.13%. The most liquid asset, you can sell it anytime during trading hours. Effective yeild 5.24 * (1-0.13 / 100)=5.233%
• VMRXX holds short-term US Treasury Bills, Repo, US Govt. Obligations, 7-day SEC Yield 5.28%, expense ration 0.10% (included into 7-day SEC yield). It could be sold only at the market closure, because it is a mutual fund. Effect yield 5.28%
• US Treasury Bills, 1M bill is going to yield (fidelity, auction) 5.36%, no expenses But because there are an auction date, settlement date, etc, it looks like I loose yield for this day when capital is not in use. Or probably I miss something. US Treasury Bills are pretty liquid, but I have never tried to sell them on market yet. If auction starts at 04/16/2024, and settlement date 04/18/2024, and maturity date is 05/30/2024, and I get a cash on the next day, 05/31/2024, it means I lose April 16, 17, 18, May 30. 4 days. Effective rate: n=365/(42+4), 5.36/365*(365-4*n) = 4.89%

So my question: what is the most profitable option to for a liquid part of the portfolio?

Update 1: I did some math,

n=365/(42+4) # times I could invest into tbill during the year

5.36/365*(365-4*n) = 4.893913043478261 # effective rate, treasury yield - settlement days

 

[cynick40]

@peter95 SEC Yield already takes expense ratio into account.

These options are very close. VMRXX won't necessarily be as state tax free, if that's a concern for your state, since it's not just treasuries.

Using a Treasury ETF like USFR, TFLO, SGOV or BIL seem to be a reasonable option, you could consider it as charging a very small expense ratio to manage a T-Bill ladder for you.

 

[sudesh]

@cynick40 One more thing, the losses from the expense ratio is calculated by multiplying the total value of the assets, not just the gains. In other words, you simply subtract the expense ratio from the base yield.

net yield = distribution yield - expense ratio

For SGOV using OP's numbers (if it was distribution yield instead of SEC), net yield = 5.24 - 0.13 = 5.11

 

[peter95]

@sudesh Thanks, makes sense, good to learn about this metrics more.

 

[peter95]

@cynick40 Thanks for the correction, updated the post.

 

[peter95]

@cynick40 Wow, thanks. I didn't know about these ETF

• WisdomTree Floating Rate Treasury Fund (USFR), SEC 30-day Yield 5.35%
• iShares Treasury Floating Rate Bond ETF (TFLO), SEC 30-day Yiled 5.38%
• SPDR® Bloomberg 1-3 Month T-Bill ETF (BIL): 30 Day SEC Yield 5.20%

Looks like TFLO is the best performing option. Not sure how it could be more efficent than managing bonds by myself with auto-roll. Or my math is wrong... Or there are some risks I don't estimate well, like US rates go up? VMRXX keep NAV $1.

 

[emilsabry]

@cynick40 Could you explain these treasury ETFs like I'm 5? I don't understand how they work.

With T-bills, what I understand is that you pay a discount price and then get the full amount later on "pay day". For instance, if you invest $1k in a 4-week T-bills, then you might actually pay only $995 now and then get $1000 after 4 weeks. This $5 is the interest that you earned on the T-bill.

The problem with T-bills is that it's not very liquid -- once you buy it, your money is locked away until the maturity date. Afaik, you COULD sell it before the maturity date but you won't get the full $1k if you do this.

That is my understanding of T-bills. However, I am totally lost on how, say, TFLO works. It is a Treasury ETF and invests in T-bills as well, but somehow it is more liquid than T-bills. It also pays interest/dividends every month, and you can sell it whenever you want. How is all of this flexibility maintained if TFLO is also just investing in T-bills? Why don't the restrictions placed on T-bills also get placed on TFLO?

What happens if you buy TFLO but sell it a few days later? Do you get paid the dividend on those few days that you held it? Since TFLO also invests in T-bills, does TFLO also have a "maturity date"? I'm guessing not, because from what I have heard, you gain dividends each month. These dividends are essentially the interest that you earn (from what I understand). I'm just so confused about treasury ETFs haha

 

[sudesh]

@emilsabry You can sell T-bills on the secondary market. Usually you'll get something in between the discounted value and the face value, depending how close you are to maturity. In your example, if you sold your 4-week $1000 T-bill early, expect somewhere between $995-$1000. Even interest rates spike sharply overnight, it is possible that it can sell for less than $995. However, that risk is limited for T-bills, especially the 4-weeks. If interest rates doubled overnight, you could still sell for at least $990. (And you would have bigger fish to fry if economic conditions required doubling the interest rates...)

As far as Treasury ETFs go, the fund managers handle buying and selling the T-bills for you. They typically issue a dividend each month for their cumulative earnings. Just look at TFLO's (or any treasury ETF's) stock price over the last year. You'll see a sawtooth pattern, with a drop at the end of each month. The stock price drops equal to the dividend and slowly builds back up over the course of the month. If you buy and sell a few days later, you still likely get interest from the monthly crawl back up (subject to interest rate risk).

I'd recommend reading the prospectus for TFLO before buying to better understand the risks (although the risk is comparatively low): https://www.ishares.com/us/literature/prospectus/p-ishares-treasury-floating-rate-bond-etf-10-31.pdf

 

[cynick40]

@emilsabry This post might help you:

https://www.reddit.com/r/Bogleheads/comments/11prp0b

 

[sudesh]

@peter95 I'm not familiar with how Fidelity works with directly buying T-Bills, but I know TreasuryDirect (and various brokers) allow for automatic reinvestment. The reinvested T-Bill will go through auction before the maturity date. So the new T-Bill's issue/settlement date starts the same day the old T-Bill reaches maturity. No "lost days" of investment. However, your funds might be inaccessible during the period between the auction date and the issue date.

In general, you get a slightly better deal if you buy the T-bills yourself. However, treasury ETFs can offer a bit more simplicity. It's a trade-off depending on your personal preference, really.

 

[peter95]

@sudesh Probably Fidelity works in the same way, sometimes I see that my balance is -10000$, I think this is a moment when a new lot bet is already on the auction, and the bills about maturity are not matured yet.

 

[mica_]

@peter95 Your calculations for Fidelity ignore the fact that the funds are in your core account (for me SPAXX, currently 4.95%) for the days they are not in T-bills during the rollover.

 

[peter95]

@mica_ It is good point. But I still lose 1 day on maturity day?

 

[mica_]

@peter95 Looking at my account it looks like it is always invested in either a T bill or SPAXX.

I have a weekly ladder of 13 t bills of 13 week duration so there is always something coming and going, but it looks like it is always fully invested.