BIL: T-Bills Are Good, But These Funds And Asset Classes Are Better

The humble t-bill has become one of the most popular investments in recent years, as Federal Reserve hikes have caused yields to spike to 5.3%, highest in decades. Few asset classes yield as much as t-bills, fewer have comparable risk and volatility. Although t-bills are fantastic investments for short-term investors looking for a place to park their cash, I think there are several similar, but stronger, alternatives to t-bills. Three stand out.

The Alpha Architect 1-3 Month Box ETF (BOXX), which achieves marginally higher returns than t-bills, at effectively identical risk and volatility, with some potential tax benefits.

The iShares Treasury Floating Rate Bond ETF (TFLO), which focuses on floating rate treasuries. These have marginally higher yields than t-bills, at effectively identical risk and volatility.

The Janus Henderson AAA CLO ETF (JAAA), which focuses on AAA-rated CLOs. JAAA yields marginally more than t-bills, with comparable credit and rate risk, but slightly higher volatility.

In my opinion, these three funds are all strong investment opportunities, and buys. Overall, TFLO seems strictly superior to t-bills, BOXX best for taxable portfolios, and JAAA more interesting for those looking for a bit more in yield than t-bills.

I’ll be focusing on the SPDR Bloomberg 1-3 Month T-Bill ETF (NYSEARCA:BIL) for the remainder of this article, but everything here should apply to other t-bill funds and t-bills as an asset class in roughly equal measure.

BIL – Quick Overview

BIL’s two most important characteristics are its competitive 5.1% dividend yield and stable share price.

The fund’s dividend yield is quite good on an absolute sense, and higher than that of most bonds and bond sub-asset classes. High-yield bonds do yield somewhat more, but at significantly higher credit risk and volatility.

BIL yields more than most bond funds as t-bills themselves yield more than most bonds. T-bills yield more than average as Federal Reserve hikes have caused their yields to spike to 5.3%. Other bond sub-asset classes have seen their yields increase too, but generally by less, as markets expect the Fed to cut rates in the coming months. Bond funds remain stuck with older, lower-yielding bonds too, unlike BIL.

BIL yields a bit less than t-bills themselves due to how dividend yields are calculated. Traditional dividend yield metrics considering dividends paid in the past twelve months, and rates / dividends were lower twelve months ago. Annualizing the fund’s latest monthly dividend payment nets a 5.3% yield, in-line with current t-bill yields.

T-bills have almost no credit risk, being backed by the full faith and credit of the U.S. government, with effectively zero rate risk either, with maturities of at most a couple of months. Due to this, BIL’s share price is incredibly stable, seeing almost zero fluctuations day to day. What little volatility the fund has is due to (temporarily) retaining dividends before distributing these to shareholders each month. BIL’s stable share price contrasts markedly with those of broader bond ETFs.

BIL’s competitive 5.1% yield and stable share price are its two most important, significant benefits. Three funds have similar, slightly superior, characteristics. Let’s have a look at these.

BOXX – T-Bills with Options

BOXX is a somewhat complicated fund. What follows is a massive simplification of how it works. I have a more in-depth explanation here, the fund itself has another one here.

BOXX buys and sells options, mostly on the S&P 500, some in individual equities. Options are selected so as to have zero market risk, by combining long and short positions in calls and/or puts. Options are selected so as to have negative cash-flows at first, positive cash-flows a short while later. Doing so is effectively equivalent to a short-term loan with no market risk. As markets are (generally) efficient, said arrangement should generate about as much in returns as t-bills do, as is indeed the case.

BOXX does have two advantages relative to BIL.

First, BOXX is generally able to generate marginally higher returns than BIL, as evidenced by the fund’s slight outperformance since inception, and by looking at option yields themselves. Right now, BOXX’s underlying holdings yield around 0.4% – 0.5% more than t-bills. Spreads are generally positive, but narrower.

Second benefit of BOXX is the fact that the fund should be able to provide some tax advantages to some investors. Specifically, BOXX is generally able to avoid generating any (taxable) net investment income or realized capital gains, retaining any and all income within the fund, and with no dividends.

Investors in BOXX should be able to defer taxes until a moment of their choosing, potentially resulting in tax savings. Any gains would be taxed as capital gains, which might face a lower tax burden.

BOXX’s returns are marginally higher than those of BIL, with some added tax advantages. In my opinion, BOXX is a strictly superior investment to BIL, with some benefits and no clear downsides.

I last covered BOXX here.

TFLO – Floating Rate Treasuries

TFLO invests in floating rate treasuries.

Credit risk is effectively identical to that of t-bills, as both are treasuries.

Interest rate risk is also effectively identical to that of t-bills, as both floating rate and very short-term securities have extremely low duration and rate risk.

Overall risk and volatility is comparable too, due to the above.

Floating rate treasuries are generally issued at a spread to t-bill rates. Spreads currently stand at 0.245%.

Right now, these spreads are reflected in dividend yields, although that has not always been the case in the past.

I am not entirely sure why yields were lower in the past. I am sure that TFLO’s underlying holdings consistently yield more than t-bills, and that this should result in higher returns for the fund. TFLO has outperformed BIL since inception, as expected.

TFLO’s underlying holdings continue to yield more than t-bills, and so the fund should continue to outperform moving forward. TFLO seems strictly superior to BIL as well, with a marginal advantage in yield, and no clear downsides.

JAAA – AAA-rated CLO tranches

JAAA focuses on AAA-rated CLO tranches, with smaller investments in those rated A – AA. Simplifying things a bunch, JAAA invests in bundles of corporate loans, and receives priority, senior payments from these.

As fund payments are prioritized, credit risk is extremely low. Default rates for AAA-rated CLOs are equal to zero. Default rates for AA and A rated ones functionally equivalent to zero.

JAAA’s credit risk is marginally higher than that of t-bills, due to the fund’s small investments in A – AA tranches, with non-zero default rates. The difference in credit risk is marginally, however.

JAAA’s interest rate risk is effectively identical to that of t-bills, as the former focuses on floating rate investments, the latter on very short-term securities.

Considering the above, JAAA actual risk should be similar to that of t-bills. In practice, volatility is materially higher, albeit still much lower than average for a bond fund.

In my opinion, the above is due to CLOs being perceived as riskier than they are, and due to being less liquid than t-bills. Long-term, JAAA’s underlying securities are quite safe, which should lead to relatively stable long-term share prices, as has indeed been the case.

JAAA yields 1.2% more than BIL, a respectable spread.

Due to the above, JAAA has outperformed BIL since inception, with almost twice the returns.

As JAAA continues to yield more than BIL, it should continue to outperform moving forward.

JAAA has moderately higher yield and returns than BIL but is somewhat more volatile. On net, I believe that JAAA is a much stronger investment opportunity, although the most risk-averse investors might disagree.

I last covered JAAA here.

Conclusion

T-bills and BIL offer investors competitive yields with almost no risk and volatility, a solid combination. Although t-bills are fantastic investments, especially for more short-term investments, I think there are a couple of better ones.

BOXX is broadly similar to t-bills, with marginally higher return, and some potential tax benefits.

TFLO is broadly similar to t-bills too, with a marginally higher yield.

JAAA is a bit more different, with a moderately higher yield, and slightly higher volatility.

In my opinion, these three ETFs are strong investment opportunities, slightly superior to t-bills, and buys.