Some investors (notably Larry Swedroe) advocate for "taking risk on the equity side." What they mean by this is that investors should keep their bond holdings conservative. From their point of view, bonds are there to dampen volatility and rebalance into equities.

This criterion excludes corporate bonds, which tend to become correlated with equities during a crash. Corporate bonds might have higher yields, but according to these investors, you can use a higher allocation of stocks to achieve the same results. 

When it comes to minimal credit risk, few assets beat the safety of U.S. Treasury bonds. As debt securities issued and guaranteed by the U.S. government, Treasurys are regarded as the "flight to safety" asset and have rallied during market crashes in 2000, 2008, and 2020.

However, buying individual issues on Treasury direct can be a pain (especially for non-U.S. investors). A better alternative is an exchange-traded fund, which offers better pricing, transparency, and liquidity. Let's look at my top three Treasury ETF picks for the last month of 2022. 

iShares U.S. Treasury Bond ETF (GOVT)

An easy way to "buy the haystack" when it comes to Treasurys is via GOVT, which tracks the ICE US Treasury Core Bond Index. GOVT holds Treasurys ranging from 1–30-year maturities, and essentially gives you access to the investable Treasury market (minus STRIPS and TIPS) in a single ticker. 

GOVT currently has an average duration of 5.97 years. All else being equal, a 1% increase in interest rates would cause GOVT to lose around 5.97% in net asset value. Right now, the ETF has a weighted average yield to maturity of 4.16%. 

A potential use for GOVT is as a replacement for traditional aggregate bond ETFs as the fixed-income allocation portion in a portfolio. By doing so, investors sacrifice some yield in exchange for lower credit risk, which can help during market crashes. 

Vanguard Long-Term Government Bond ETF (VGLT)

Long-term Treasury bonds like VGLT suffered heavily this year after many years of outperformance. These Treasurys are among the most sensitive to rising interest rates due to their high durations. Case in point, VGLT currently has an average duration of 15.9 years.

Historically, VGLT has strongly outperformed during crashes when rates are slashed to stimulate markets, making it a possible hedge against equity risk. Notably, the ETF returned 7.29% in January 2020, 6.60% in February 2020, and 6.42% in March 2020 throughout the COVID-19 market crash.

As of writing (November 16th), VGLT trades at $62.59 per share, putting it back at levels not seen since 2011. Depending on your thesis for how the Fed pivots (or doesn't), long-term Treasurys like VGLT could be a good way to bet on interest rate changes. The ETF costs an expense ratio of 0.04%. 

U.S. Treasury 10-Year Note ETF (UTEN)

UTEN is a "single-bond ETF," a new and highly innovative product. At any given time, the ETF holds a single bond issue consisting of the current on-the-run U.S. 10-year Treasury note. When the next Treasury is issued, UTEN will automatically roll its holdings. 

UTEN enables investors to avoid the hassle of purchasing individual issues on Treasury direct. Compared to traditional bond funds which hold a ladder of different maturities, UTEN allows investors to express precise yield curve and interest rate views.

Other benefits include monthly interest payments compared to the semi-annual coupon payments of owning the 10-year Treasury note directly. The ETF wrap structure also provides tax-efficiency, lower transaction costs, and smaller bid-ask spreads. UTEN's expense ratio is 0.15%. 

Disclaimer: This article is limited to the dissemination of general information pertaining to investment strategies and financial planning and does not constitute an offer to issue or sell, or a solicitation of an offer to subscribe, buy, or acquire an interest in, any securities, financial instruments or other services, nor does it constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment.