Why I Prefer This Low-Risk, Monthly Income Treasury Bill ETF Over Money Market Funds

The Federal Reserve has decided to hold its policy interest rate steady in the 3.50% to 3.75% range. While there has been growing concern around cracks in the labor market, the ongoing U.S.-Israel and Iran war, now entering its 24th day, is very likely to push inflation higher. At this point, it looks like the Fed is prioritizing the inflation side of its dual mandate.

One of the immediate beneficiaries of that decision, at least for now, is cash-like instruments. Money market funds, in particular, continue to offer relatively attractive yields with very low risk. With rates holding steady, investors can still earn a decent yield, albeit not truly risk-free in the same way a certificate of deposit would be.

That said, I am not a big fan of money market funds. Part of that is practical. As a Canadian investor, many of these are not easily accessible since they are structured as mutual funds. But even beyond that, there are structural drawbacks.

While I do appreciate the fixed $1 net asset value, the tax efficiency, especially for prime money market funds, leaves something to be desired. You also lose the flexibility of intraday trading that ETFs offer. A more appealing alternative, in my view, is Treasury bill ETFs.

These funds package short-term government debt into an ETF wrapper, often paying monthly distributions. In many cases, those distributions are exempt from state taxes. Unlike individual Treasury bills, which are issued at a discount and mature at face value without periodic income, these ETFs convert that return profile into a steady cash flow.

There is quite a bit of variety in this space, but my current favorite is the F/m U.S. Treasury 3 Month Bill ETF (TBIL) for a few reasons. Here are three of the main ones.

Targeted Exposure

Most bond ETFs are built around an average maturity or duration target. You will see labels like short-term, intermediate, or long-term, but those are just averages across a portfolio of dozens, hundreds, or even thousands of bonds.

More importantly, if you are trying to express a specific view on a particular part of the yield curve, most bond ETFs do not give you precise exposure.

TBIL is different. At any given time, it holds the latest “on-the-run,” meaning recently issued three-month Treasury bill. As soon as a new one is issued, the fund rolls its position into that new bill.

If you have ever tried to manage Treasury bills yourself through TreasuryDirect.gov, you will immediately appreciate how much easier this makes things.

Another benefit is clarity around yield. With traditional bond ETFs, you often have to compare metrics like the 30-day SEC yield and yield to maturity, which can tell slightly different stories depending on the portfolio and the shape of the yield curve.

With TBIL, it is straightforward. The current 30-day SEC yield is 3.44%, and that is after accounting for the 0.15% expense ratio. What you see is what you get.

Hands-Off Income

Treasury bill ladders can be very effective for cash management. A simple ladder might involve buying three-month, six-month, and one-year Treasury bills. As each one matures, you reinvest the proceeds into a new bill, maintaining a rolling structure that provides steady liquidity and income.

The problem is execution. Every time a bill matures, you have to manually reinvest it. If you have ever used TreasuryDirect.gov, you already know how clunky that process can be.

TBIL handles all of that for you. There is no operational burden. The fund continuously rolls into new three-month bills on your behalf. You just hold the ETF, and it pays out monthly distributions.

Those distributions are also generally exempt from state income taxes, which is a nice bonus for U.S. investors living in places like California or New York.

Refreshing Simplicity

In an era where ETFs are getting increasingly complex, with swaps, equity-linked notes, and multi-leg options strategies, there is something refreshing about a fund that just does one thing well.

TBIL is about as simple as it gets. At any given time, it holds a single, very short-term U.S. Treasury bill. It earns interest. It pays that interest out monthly. It charges a low fee.

There are no layers of derivatives, no hidden exposures, and no complicated strategy to decipher. The transparency is high, and the structure is easy to understand.

While the net asset value is not fixed at $1 like a money market fund, in practice it is very stable given the extremely short duration and high credit quality of the underlying holdings.

Liquidity is also strong, with tight bid-ask spreads often around one cent. For a low-risk income allocation, I think TBIL checks a lot of boxes with very little complexity.