Buying Treasury Bill ETFs vs. Buying Treasury Bills Directly

What Are Treasury Bills and Treasury Bill ETFs?

Treasury bills are short-term debt instruments issued by the US government, with maturities ranging from a few weeks to one year. They’re considered one of the safest investments, backed by the full faith and credit of the US government, making them ideal for capital preservation and liquidity. Treasury bills are sold at a discount to their face value, and you receive the full face value at maturity—the difference being your return.

A Treasury bill ETF is a fund that pools investors’ money to buy a basket of Treasury bills, typically tracking an index like the Bloomberg 1-3 Month US Treasury Bill Index. These ETFs trade like stocks on major exchanges, offering an indirect way to gain exposure to Treasury bills without purchasing them directly.

Buying Treasury Bills Directly: The Hands-On Approach

Purchasing Treasury bills directly is typically done through TreasuryDirect, the US government’s platform for buying and managing Treasury securities, or via a brokerage account that offers access to Treasury auctions or the secondary market.

Advantages

Zero Credit Risk: When you buy Treasury bills directly, you’re dealing with the US Treasury itself. There’s no intermediary, so there’s no institutional risk—your investment is as safe as it gets, barring a US government default, which is highly unlikely.

No Fees: TreasuryDirect allows you to buy Treasury bills at auction with no commission or management fees. If you hold to maturity, you avoid expense ratios or trading costs that come with ETFs.

Tax Benefits: Interest from Treasury bills is exempt from state and local taxes, a benefit that applies whether you buy directly or through an ETF. However, buying directly ensures you’re not paying additional fees that could erode this tax advantage.

Control Over Maturity: You can choose the exact maturity that fits your timeline, from 4 weeks to 52 weeks, allowing precise cash flow planning.

Drawbacks

Management Effort: Buying Treasury bills directly requires active management. You need to roll over your investment at maturity if you want to stay invested, which involves monitoring auctions and reinvesting—a process that can be time-consuming.

Minimum Investment: The minimum purchase for Treasury bills is $100, but auctions often require larger increments, and some brokers have higher minimums (e.g., $1,000). This can limit flexibility for smaller investors.

Liquidity Challenges: While you can sell Treasury bills before maturity in the secondary market, this involves transaction costs and potential price fluctuations due to interest rate changes. TreasuryDirect also requires transferring Treasury bills to a brokerage for early sales, adding complexity.

Buying Treasury Bill ETFs: The Convenient Option

Treasury bill ETFs, such as the iShares 0-3 Month Treasury Bond ETF (SGOV) or the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), provide a more passive way to invest in Treasury bills. These funds hold a diversified portfolio of Treasury bills and are traded on exchanges like stocks.

Advantages

Ease of Access: Treasury bill ETFs are incredibly convenient. You can buy and sell shares anytime during market hours through a standard brokerage account, often with commission-free trades at major brokers like Fidelity or Charles Schwab. There’s no need to manage rollovers—the ETF does that for you.

Liquidity: ETFs offer intraday liquidity, allowing you to enter or exit positions quickly. For example, SGOV boasts a 0.01% 30-day median bid-ask spread, making it highly liquid with minimal trading costs.

Flexibility for Small Investments: ETFs allow you to invest smaller amounts without waiting for auction minimums. Share prices for Treasury bill ETFs often hover around $50-$100, making them accessible for investors with limited capital.

Diversification: ETFs hold a basket of Treasury bills with varying maturities (e.g., 0-3 months for SGOV), reducing the risk of overexposure to a single maturity date.

Drawbacks

Expense Ratios: ETFs come with management fees, though they’re typically low for Treasury bill ETFs. For instance, SGOV has a 0.09% expense ratio, while BIL charges 0.135%. On a $10,000 investment, that’s $9-$13.50 annually—small, but not zero like buying directly.

Institutional Risk: While Treasury bills themselves are risk-free, ETFs introduce a layer of institutional risk. The ETF provider (e.g., iShares or SPDR) could face operational issues, such as a shortfall in holdings due to mismanagement or fraud. Though rare, this risk doesn’t exist when buying directly.

Tax on Capital Gains: If you sell an ETF at a profit, you may owe state taxes on capital gains (except in states like New Jersey for qualified funds), unlike Treasury bills held to maturity, which avoid capital gains entirely.

Slight Yield Reduction: The ETF’s yield to maturity (e.g., 4.3% for SGOV) is reduced by the expense ratio, meaning your net return is slightly lower than if you bought Treasury bills directly.

Key Considerations for Investors

Yield and Returns

As of May 2025, short-term Treasury bill yields are attractive, with 3-month Treasury bills offering around 4-5% based on historical trends and recent market conditions. ETFs like SGOV and BIL closely mirror these yields but deduct their expense ratios. For example, if a Treasury bill yields 4.5% and the ETF’s expense ratio is 0.09%, your net yield is 4.41%. The difference is small but compounds over time for larger investments.

Risk and Safety

Both options are backed by the US government, making them virtually risk-free in terms of default. However, ETFs carry a minor institutional risk, as noted in discussions on platforms like Bogleheads.org. In dire market conditions, an ETF provider could face liquidity issues, whereas direct Treasury bill holdings are immune to such risks.

Time and Effort

If you value simplicity, ETFs are the way to go. Managing a Treasury bill ladder—buying, holding, and rolling over securities—requires effort and attention to auction schedules. ETFs handle this for you, making them ideal for passive investors or those with smaller portfolios.

Tax Implications

The tax advantage of Treasury bills (exemption from state and local taxes) applies to both methods. However, selling an ETF before maturity can trigger capital gains taxes, which may be taxable at the state level, whereas holding a Treasury bill to maturity avoids this issue entirely.

Which Should You Choose?

Choose Buying Treasury Bills Directly If:

You want absolute control over your investment, including maturity dates and cash flow timing.

You’re comfortable managing your portfolio actively, including rolling over Treasury bills at maturity.

You have a larger investment (e.g., $10,000 or more), where the impact of ETF fees becomes more noticeable.

You prioritize minimizing all fees and institutional risks, even if it means more effort.

Choose a Treasury Bill ETF If:

You prefer a hands-off approach and want the convenience of buying and selling shares anytime.

You’re investing smaller amounts and want flexibility without auction minimums.

You value liquidity and the ability to adjust your position quickly without dealing with the secondary market.

You’re okay with a small expense ratio in exchange for simplicity and diversification.

A Balanced Approach

For some investors, a hybrid strategy works best. You might hold a core position in Treasury bills directly for larger sums where fees matter more, while using a Treasury bill ETF for smaller, more liquid portions of your portfolio. This approach balances control, cost, and convenience.

My Take as an Experienced Investor

From my perspective, the choice depends on your investment size and time commitment. For portfolios under $50,000, the convenience of a Treasury bill ETF like SGOV often outweighs the minor cost of its expense ratio. The liquidity and ease of management are hard to beat, especially if you’re not keen on monitoring Treasury auctions. However, for larger sums—say, $100,000 or more—I lean toward buying Treasury bills directly through TreasuryDirect. The fee savings become significant, and I appreciate the direct relationship with the US Treasury, eliminating any intermediary risk.

It’s also worth noting that the current yield environment (4-5% for short-term Treasury bills) makes both options attractive compared to traditional savings accounts, which often yield far less (e.g., 0.55% national average as noted in posts on X). But yields can change with Federal Reserve policy, so stay informed about rate expectations.

Conclusion

Neither buying Treasury bills directly nor investing in a Treasury bill ETF is inherently “better”—it’s about what fits your needs. Direct purchases offer maximum safety and zero fees but require more effort. Treasury bill ETFs provide convenience and liquidity at the cost of small fees and slight institutional risk. As an experienced investor, I recommend assessing your portfolio size, time availability, and liquidity needs before deciding. In today’s market, both options remain solid choices for capital preservation and earning a low-risk yield, but understanding their nuances ensures you make the most of your investment.

--------------

Disclaimer: The content shared here is based on personal experiences and is intended for informational purposes only. It does not constitute financial, investment, or professional advice. The author is not a licensed financial advisor and does not take responsibility for any financial losses or decisions made based on the information provided. Always consult with a qualified professional before making any investment decisions.