Vanguard recently released an announcement that in “First Quarter 2025” they will be releasing two new index ETFs that both hold short-term US Treasury Bonds:
- Vanguard 0-3 Month Treasury Bill ETF (VBIL). Holds Treasuries with maturities of 3 months or less. Estimated expense ratio of 0.07%.
- Vanguard Ultra-Short Treasury ETF (VGUS). Holds Treasuries with maturities of less than 12 months. Estimated expense ratio of 0.07%.
Currently, I would say the two best options for those who want low-cost exposure to Treasury Bills as a cash alternative without having to manually manage their own T-Bill ladder are:
- iShares 0-3 Month Treasury Bond ETF (SGOV). Holds Treasuries with maturities of 3 months or less (1.2 months weighted average as of 12/2024). Expense ratio of 0.09%. 30-day historical median bid/ask spread of 0.01%. Can be bought and sold at nearly any brokerage.
- Vanguard Treasury Money Market Fund (VUSXX). Maintains a NAV of $1. Holds Treasuries with average maturity of 38 days (as of 10/31/24). Expense ratio of 0.09%. Usually must be bought and sold within a Vanguard brokerage accounts to avoid transaction fees.
The advantages of owning properly-managed T-Bill funds are that you hopefully maintain the state income tax exemption of T-Bill interest, while adding the convenience and easy liquidity of ETFs and mutual funds. T-Bills often give residents of states with high local/state income taxes the highest tax-equivalent yield available for a cash equivalent (minimal volatility, minimal principal risk).
For tax year 2023, SGOV reported 96.45% of interest was derived from qualified U.S. Government and agency obligations. In many states, this meant that 96.45% of the interest paid out was exempt from state and local income taxes.
For tax year 2023, VUSXX reported 80.06% of interest was derived from qualified U.S. Government and agency obligations. In many states, this means that 80.06% of the interest paid out was exempt from state and local income taxes.
Ideally, VBIL will be very similar to SGOV with a tight bid/ask spread and nearly all interest eligible for state income tax exemption, but with even lower expenses and thus higher net yields. Something to keep a look out for in early 2025.
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VUSXX’s state tax efficiency has been a bit of a disappointment. Until a couple of years ago, Vanguard kept it a “pure” Treasury fund. (I owned it.) Now, we can’t count on how much will be state tax-exempt. In contrast, a fund like Fidelity Investments Money Market Treasury Only FSIXX invests nearly all its assets in Treasuries (94.89% state exempt in 2023).
The key is to look for Treasury _Only_ funds. Otherwise there’s a risk that the fund will hold a lot of repurchase agreements which are not state tax exempt. This is especially important in New York, Connecticut, and California. In those states, if a fund isn’t at least 50% state tax-exempt, you get no tax break at all – no pro rata exemption.
FSIXX is an institutional class fund, but it’s available NTF with a $1 min at Merrill Edge: https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/ICCRateSheet.pdf
And if you have your heart set on VUSXX but don’t want to deal with Vanguard, you can get it NTF ($3K min) at E*Trade: https://www.etrade.wallst.com/v1/stocks/snapshot/snapshot.asp?symbol=VUSXX