The one benefit of the bear market in bonds since the beginning of 2022 is that it's turned Treasury bills into a compelling asset class again. Gone are the days where T-bills paid literally nothing. Today, you can get nearly a 5% dividend yield from a virtually risk-free investment.

If you think a recession is near, the market's going to plunge again or the real estate market is going to degrade, why not at least consider picking up a Treasury with a maturity of a year or less, get a 4-5% (virtually) risk-free yield and just sit this market out for a while? That may or may not prove to be a good choice over time, but the fact that investors now have this in their toolbox is a great thing!

The ultra short-term Treasury bond ETF market currently has about $73 billion in assets. Net inflows over just the past 12 months are nearly $33 billion. Clearly, investors are piling into this space pretty hard and taking advantage of the combination of safety and yield.

If you're looking to invest in ultra short-term Treasury bills, there are two primary ETFs to consider - the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the iShares 0-3 Month Treasury Bond ETF (SGOV) (although the U.S. Treasury 3 Month Bill ETF (TBIL) looks like it could soon become a contender). These two account for more than half of the assets in this space and while, on the surface, they may seem interchangeable, there are some modest differences between the two that could set one apart from the other depending on exactly what you're looking for.

SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)

BIL tracks the Bloomberg 1-3 Month U.S. Treasury Bill Index and seeks to provide exposure to U.S. Treasury Bills that have a remaining maturities between 1 and 3 months. The fund launched in May 2007 and with nearly $30 billion in assets is the largest T-bill ETF in the marketplace. Its current duration of 0.08 years means that there is very little impact from fluctuating interest rates.

iShares 0-3 Month Treasury Bond ETF (SGOV)

SGOV tracks the performance of the ICE 0-3 Month U.S. Treasury Securities Index. It is composed of U.S. Treasury bonds with remaining maturities less than or equal to three months. It's a relatively newer fund having only launched in May 2020. Of the three largest T-bill ETFs, SGOV is easily the cheapest at 0.05%, which may be its biggest advantage.

Exposure

BIL invests in T-Bills with 1-3 month remaining maturities and SGOV invests in T-bills with 0-3 month remaining maturities. The obvious difference is what lies in that 0-1 month bucket that doesn't for BIL.

As of the middle of May 2023, slightly more than half of SGOV's assets are invested in securities with maturities of less than a month, so there is some difference in how the portfolios are constructed.

If you dig further into BIL and SGOV, both ETFs have average weighted maturities of 0.12 years, even though BIL avoids the 0-1 month bucket. That's because SGOV's maturity allocation looks more like a barbell - heavier weightings in the 0-1 month and 2-3 month segments with less in the middle. BIL looks more equally-weighted across maturities.

When dealing with such a small window of maturities, there's really very little difference. Is there an advantage in SGOV's ability to hold less-than-one-month bills? Perhaps it adds a little flexibility, but not much. Personally, I like BIL's similar weightings across the maturity spectrum, but admittedly we're slicing hairs here.

Advantage: BIL

Dividend Yield

As of May 12, 2023, BIL has a yield of 4.62% and SGOV has a yield of 4.82%.

Since the Fed began its rate hiking cycle, the yield advantage of 3-month bills over 1-month bills has been right around 40 basis points. That puts SGOV in the more advantageous position since the yield gained from its overweight to the 2-3 month maturity outweighs the yield lost from the overweight to the 0-1 month maturity. If you look at the yield difference between BIL and SGOV historically, it's been about 0.10% in favor of SGOV.

As we'll see in a moment, the lower expense ratio also plays a part.

Advantage: SGOV

Expense Ratio & Fees

BIL has an expense ratio of 0.1354% vs. SGOV's net expense ratio of 0.05%.

Note: The expense ratio of SGOV listed in the prospectus is 0.12%, but the advisor is waiving a percentage of the fee through June 30th of this year. I expect the fee waiver to continue beyond this date.

That's a big gap when we're talking about such a target T-bill universe.

Trading spreads need to be considered as well, although that tends to be a bigger issue with smaller funds, not funds with $30 billion and $10 billion! As expected, trading spreads are virtually non-existent for both ETFs, so there's no advantage on either end.

In a vacuum, a lower expense ratio is better, especially for two incredibly similar portfolios.

Advantage: SGOV

Risk-Adjusted Returns

Due to SGOV's more recent launch, we can only measure this during the time when both ETFs existed.

Using the historical Sharpe ratio of BIL and SGOV as our measuring stick, SGOV has consistently delivered better risk-adjusted returns. This is most likely a function of SGOV's modest yield advantage giving it the edge when both ETFs have virtually non-existent levels of risk. I'd expect the fund with the higher yield to probably win the risk-adjusted return match-up going forward. Since that's almost always been SGOV, historically, it gets the advantage, but that could easily change if BIL starts delivering a higher yield in the future.

Advantage: SGOV

Investment Risk

This one I think is pretty straightforward. The two portfolios are similar enough that there's no material difference in risk. Both BIL and SGOV experience very little volatility and should be expected to do so going forward.

Advantage: Even

Conclusion

Overall, BIL and SGOV look very similar and will behave very similarly regardless of market environment. In my opinion, the dividend yield and the expense ratio are the dealbreakers.

SGOV charges 0.08% less than BIL and that difference will be directly reflected in the yield of the funds. SGOV has pretty consistently yielded about 0.10% more than BIL and the expense ratio difference (as long as it remains this way) is likely to keep the advantage in SGOV's favor. If SGOV decides to get rid of the yield waiver, the two dividend yields probably become nearly identical and this comparison becomes a toss-up. If SGOV offers the yield advantage for essentially the same risk, might as well take it!

SGOV is my winner.