The U.S. Is Shelling Out $2.9 Billion Per Day In Interest And These ETFs Let You Get A Piece Of It

The U.S. national debt is a hot topic as the government continues to spend more than it earns. With the debt currently standing at a staggering $34 trillion, the interest payments alone are eating up a significant portion of the budget. In fact, the U.S. is shelling out a whopping $2.9 billion per day in interest, according to recent data. This astronomical figure is directly related to the current high interest rate environment, with the Federal Reserve signaling that rates will remain higher for longer to combat inflation.

As the government issues Treasury bonds, bills and notes to finance its debt, investors are the ones receiving these hefty interest payments. While some may view the ballooning national debt as a cause for concern, savvy investors recognize it as an opportunity to generate income in their portfolios.

Treasury ETFs to Consider

For retail investors looking to capitalize on the high interest rates and earn a piece of the billions in daily payments, Treasury ETFs offer a simple and accessible solution. These ETFs hold a basket of U.S. Treasury securities, providing exposure to various maturities and strategies. Here are four Treasury ETFs to consider, each with a unique approach:

Schwab Short-Term U.S. Treasury ETF (SCHO)

The Schwab Short-Term U.S. Treasury ETF tracks the total return of the short-term U.S. Treasury bond market, focusing on securities with remaining maturities between 1 and 3 years. This ETF is an excellent choice for investors prioritizing capital preservation and liquidity.

With an ultra-low expense ratio of just 0.03%, SCHO is one of the most cost-effective options in its category. The fund’s short-term focus results in lower interest rate risk compared to intermediate and long-term Treasury ETFs. However, this also means that yields may be lower than those of its longer-duration counterparts.

Vanguard Intermediate-Term Treasury ETF (VGIT) 

For investors seeking a balance between yield and interest rate risk, the Vanguard Intermediate-Term Treasury ETF is a compelling choice. VGIT tracks the Bloomberg US Treasury 3-10 Year Bond Index, providing exposure to U.S. Treasury securities with remaining maturities between 3 and 10 years.

The ETF’s intermediate-term focus offers the potential for higher yields compared to short-term funds like SCHO. However, it’s important to note that this comes with increased interest rate risk, as intermediate-term bond prices are more sensitive to changes in interest rates. VGIT’s expense ratio of 0.04% is highly competitive, ensuring that more of the fund’s returns end up in investors’ pockets.

iShares 20+ Year Treasury Bond ETF (TLT)

For those willing to take on more interest rate risk in exchange for potentially higher yields, the iShares 20+ Year Treasury Bond ETF is worth considering. TLT tracks an index composed of U.S. Treasury bonds with remaining maturities greater than 20 years, offering targeted exposure to the long end of the yield curve.

The ETF’s long duration makes it highly sensitive to interest rate fluctuations, meaning that prices can be more volatile compared to shorter-duration funds. However, TLT also offers the highest potential yield among the ETFs discussed here. Additionally, long-term Treasuries can act as a hedge against inflation, as their prices tend to rise when inflation expectations fall.

iShares Core U.S. Aggregate Bond ETF (AGG)

Investors looking for a more diversified approach to fixed income investing should consider the iShares Core U.S. Aggregate Bond ETF. AGG tracks the Bloomberg US Aggregate Bond Index, providing broad exposure to the U.S. investment-grade bond market, including Treasuries, corporate bonds, and mortgage-backed securities.

While AGG is not a pure-play Treasury ETF, the fund’s significant allocation to government bonds means it still offers exposure to the high-interest-rate environment. The ETF’s diversification across bond sectors and issuers can help mitigate risk, but it’s important to note that the inclusion of corporate bonds adds credit risk compared to a portfolio of solely government-backed securities.

Points to Consider

When deciding which Treasury ETF to invest in, there are a few key factors to keep in mind:

Your financial goals: Are you prioritizing current income, capital preservation, or a balance of the two? Your answer will help determine which maturity range and ETF strategy best aligns with your objectives.

Your risk tolerance: While all Treasury ETFs offer exposure to high-quality government bonds, those with longer durations come with increased interest rate risk. Be sure to assess your comfort level with potential price fluctuations before investing.

Expense ratios: While the ETFs discussed here all boast low expense ratios, even small differences in fees can add up over time. Consider the impact of expenses on your total returns when making your selection.

With the U.S. government spending billions per day on interest payments, Treasury ETFs offer investors a way to benefit from the current high-rate environment. By providing exposure to various segments of the Treasury market, these funds can help income-focused investors cash in on the government's high level of spending.

However, it’s important to remember that while Treasury ETFs can play a valuable role in a diversified portfolio, they may offer lower total return potential compared to stock ETFs over the long run. As with any investment decision, it’s crucial to consider your individual circumstances, including your risk tolerance, time horizon and overall financial plan. You should consult with a financial advisor to help determine if Treasury ETFs make sense for your situation.

Investors should also keep in mind that the ETF structure comes with its own set of considerations, such as trading costs and potential premiums or discounts to net asset value. Additionally, the tax implications of investing in Treasury ETFs may vary depending on your situation.

Ultimately, by understanding the unique characteristics and risks associated with each Treasury ETF, investors can make informed decisions and potentially benefit from the billions in daily interest payments flowing from the U.S. government to bondholders.

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