Two savers each put money into Treasurys in October 2020, when yields were a rounding error. One bought a note and put the confirmation in a drawer. One bought a fund. Six years and a Fed cycle later, the drawer looks serene and the fund statement looks bruised — and the Journal's Telis Demos argues Friday that the calm is more appearance than substance. “It's a comforting optic,” BlackRock's Stephen Laipply tells him. The fund's maturing bonds have been rolling into new ones at higher yields the whole way up; the note in the drawer pays its 2020 coupon until the day it's due.
Demos's question is the right one: are you a bond trader or a yield farmer? A trader buys Treasurys because high yields mean cheap prices and — in his framing, not ours — stocks look historically expensive; that's a bet on where yields go next. A yield farmer buys for the income — to cover a known expense over the bond's life, or to beat a bank account. The answer decides the vehicle, because the real difference between a bond and a bond fund isn't that bonds are fiddlier to trade. It's maturity. A Treasury hands back your principal on a date. Many popular bond ETFs, with some exceptions, never mature: when a bond inside the fund pays off, the cash rolls into a new one, and if you sell, you get the day's market price for the whole portfolio, not what you put in.
Here's the part that cuts both ways. The FactSet chart on the page tracks the iShares 3-7 Year Treasury Bond ETF (IEI) from October 2020 through this week — a stretch in which the Fed took short rates from near zero to above 5%. The fund's price is down about 15%. Its total return, with payouts reinvested, is nearly flat. The same never-ending roll that kept the fund's price exposed to every rise in yields also lifted its distributions as rates climbed. A single bond bought at 2020's near-zero yield got no such help, and if you have to sell it early — and life sells bonds early — you take the market's price too. Unless you're certain you won't need the money before maturity, or the income exactly matches a fixed bill, Demos notes, the bondholder carries the same price risk as the fund holder; he just doesn't have to look at it.
Pick the job, then the tool
The menu in between is where a lot of households' answers turn out to be: defined-maturity ETFs that hold to a date and return principal (BlackRock's iBonds, Invesco's BulletShares), funds that stay inside a short range such as one to three years, ladders of bonds or of defined-maturity ETFs, and TIPS, whose principal rides the consumer-price index. Each is a different answer to the same question — when do you need the money back, and do you know?
Our read
Fixed Income (IN02), with a nod to Retirement (M10). Our rule is older than this column: decide the job before the vehicle. A tuition bill due in 2028, a down payment, a bridge to a pension date — that money has a date, so give it an instrument with one: a bill, a note, a ladder rung, a defined-maturity fund. A standing allocation has no date, so a fund's never-ending roll is a feature, not a flaw; what you match is its duration to your horizon, not its yield to your hopes. That's why the desk's safe money sits in Treasury bills and floating-rate paper — SGOV in 49 model books, USFR in 14 — and the flag Demos doesn't raise is one we will: those are open-ended funds too, with no maturity date. What protects them is near-zero duration, not a promise. Intermediate Treasurys (IEF) stay at weight in 11 books, nothing added; the paper's ETF table has IEF down 7.0% in price this year and the long TLT down 10.7% — the duration lesson priced to the decimal, and why long paper stays avoided, TLT in only 4 older books.
Demos ends by allowing that trading isn't always the wrong answer, and for some investors it isn't; for a household's safe money we'd set that bar high. The 26-week bill came in at 4.165% at the latest auction in the Money Rates table — a need six months out can be met at that rate without a view on where the 10-year goes, and a ladder does the same job for needs further out. If you can't say in one sentence what your bond money is for, that's the review — the kind you have before the roof leaks, not after.