OBIL: Good Vehicle But Duration Makes More Sense

The US Treasury 12 Month Bill ETF allows investors to access T-Bills without opening an account with the Treasury. The OBIL ETF provides consistent income with low volatility through its focus on the on-the-run 12-month T-Bill. The fund offers stable returns, high liquidity, and zero credit risk, but is susceptible to interest rate risk and lacks diversification

The nice thing about exchange-traded funds, or ETFs, is that you can almost buy anything easily from your brokerage account. To that end, the US Treasury 12 Month Bill ETF (NASDAQ:OBIL) is an elegant fund that allows for anyone to access T-Bills without opening an account with the Treasury.

OBIL aims to provide investment results corresponding to the price and yield performance of the ICE BofA US 12-Month Treasury Bill Index (G0O3), before fees and expenses. Simply put, the ETF provides investors with the yield of 12-month Treasury Bills (T-Bills).

If you believe in higher for longer, this can be a good “sleep well at night” vehicle to take advantage of yield with consistent income without too much volatility in the underlying.

How It Works

OBIL builds its portfolio around a single asset class – the on-the-run 12-month T-Bill. Each month, the US Treasury auctions a new 12-month Treasury bill. Once the auction is completed and settled, OBIL sells the old 12-month US Treasury and rolls into the newly issued 12-month US Treasury. This roll-over process ensures that the fund constantly holds the most recent issue, thereby providing continual exposure to the 1-year duration point. Since OBIL invests solely in the on-the-run 12-month T-Bill, it only holds one position at a time. This single-asset nature distinguishes OBIL from other ETFs that typically hold a diverse range of assets. What you see is what you get with this.

OBIL, by the nature of its investment strategy, falls into the fixed income sector, specifically, the US Government Bonds sub-sector. Given that it invests exclusively in US Treasury bills, 100% of its weightings are allocated to this particular asset class.

Peer Comparison

When compared to other similar ETFs that focus on US Treasury bills, OBIL stands out due to its unique strategy of rolling over into the latest issue each month. This tactic provides investors with consistent exposure to the 1-year duration point, a feature not commonly found in other ETFs. It also means investors don’t have to do it themselves, and just have to give up 0.15% on the expense ratio for the fund’s expense. With a yield of 5.16%, that’s not a high fee for the convenience factor.

Pros and Cons of Investing in OBIL

Pros

1. No Credit Risk: Since the fund invests solely in US Government-backed Treasury bills, it carries zero credit risk.
2. Stable Returns: OBIL provides stable returns equivalent to the yield of 12-month T-Bills.
3. Highly Liquid: As an ETF, OBIL offers high liquidity, allowing investors to buy and sell shares on the secondary market at market prices.

Cons

1. Interest Rate Risk: Due to its 1-year duration, the fund is susceptible to interest rate risk. If rates rise, the value of the T-Bills may fall.
2. Single Asset Focus: The fund’s exclusive focus on 12-month T-Bills means that it doesn’t offer the diversification found in other ETFs.

Conclusion: To Invest or Not to Invest

Investing in OBIL offers a good yield and an easy way to access T-Bills. However, I’m more a fan of adding duration to your portfolio here given I suspect the Fed overtightened and the risk of a credit event hasn’t gone away in corporate bonds. US Treasury 12 Month Bill ETF is a good fund, and the simplicity makes it attractive for a large number of conservative investors.

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