What are the differences in U.S. Treasury bond ETF underlying assets? A comparative analysis of the top five U.S. Treasury bond ETFs in the market.

The expectation of rate cuts by the Fed is rising, and funds are pouring into the bond market on a large scale. In the second week of August 2025, US bond ETFs saw an inflow of $15.3 billion in a single week, reaching 7 times the inflow of stock ETFs. Among them, short-term Treasury bond ETFs like SGOV and BIL have become the preferred cash management tools due to their strong liquidity and low interest rate risk.

Long-term U.S. Treasury ETFs like TLT attract investors betting on capital gains from interest rate cuts, with open interest in the options market reaching 5.78 million contracts, indicating strong market expectations for its price volatility.

Market Turning Point: ETF Fund Flow on the Eve of Interest Rate Cuts

In August 2025, the Fed's interest rate cut expectations reshape the bond market landscape. The CME FedWatch tool shows that the market's expectation for a rate cut in September has exceeded 94%. This expectation has triggered a large-scale reallocation of funds:

• Short-term Treasury ETFs become a safe haven: iShares 0-3 Month Treasury ETF (SGOV) saw an inflow of $2.3 billion in a single week, while SPDR 1-3 Month Treasury ETF (BIL) had an inflow of $1.6 billion. These products offer both high current yields and the ability to withstand interest rate fluctuations.
• Long Bond ETF Speculation on Capital Gains: iShares 20+ Year Treasury Bond ETF (TLT) has open option contracts reaching 5.78 million, which is 106.38% of the 30-day average, indicating that investors bet on interest rates falling to boost long-term bond prices.
• Corporate Bond ETF with Balanced Strategy: Vanguard Intermediate-Term Corporate Bond ETF (VCIT) stands out in Q2 among passive products with a 5.11% SEC yield and an ultra-low fee rate of 0.03%.

The market's preference for interest rate-sensitive assets has differentiated, highlighting the differences among various US Treasury ETFs as a core consideration for allocation.

Analysis of the Differences Among the Five Major US Treasury Bond ETFs

Core Difference One: Minor Differences in Index Compilation Rules Lead to Position Divergence ###

• The difference in "floating adjustment" between AGG and BND The iShares Core U.S. Aggregate Bond ETF (AGG) tracks the Bloomberg U.S. Aggregate Bond Index, while the Vanguard Total Bond Market ETF (BND) tracks its floating-adjusted version.

Floating adjustments mean the removal of the bond holdings held by the Fed. As of June 2025, BND's allocation to agency MBS is about 5 percentage points lower than AGG, with a corresponding overweight in Treasuries.

Historical data shows that during the rising interest rate phase, the floating adjustment index may lag behind the non-adjusted index (such as an average difference of 7 basis points from 2013 to 2015), but performs better during times of heightened risk aversion (such as during the COVID-19 pandemic in 2020).

• The return structure differences of long-term US Treasury bond ETF For example, taking popular varieties in the Taiwan stock market: CITIC US Treasury 20 Years (00795B) has a distribution of 0.35/0.38/0.4 yuan for the first three quarters before 2025, with a total distribution amount ranking among the top in its category. Cathay 20-Year U.S. Treasury Bond (00687B) has a corresponding distribution of 0.34/0.34/0.42 yuan, with good liquidity but slightly lower total returns.

Key difference: 00795B has an advantage of post-tax returns for small investors due to its smaller scale, exempting it from additional premium deductions.

Core Difference II: Trade-off between Credit Risk and Yield

• Investment Grade Corporate Bonds: Risk-Return Characteristics of LQD and VCIT The iShares Investment Grade Corporate Bond ETF (LQD) offers an approximate yield of 4.3%, but the portfolio covers corporate bonds from multiple industries, which entails credit spread risk.

Vanguard Intermediate Corporate Bond ETF (VCIT) focuses on bonds with maturities of 5-10 years, with 90% of its holdings rated A/BBB, avoiding exposure to high-yield bonds and demonstrating stronger defensiveness during credit shocks.

• High-yield characteristics of non-investment grade bonds Taking the KGI U.S. Non-Investment Grade Bond ETF (00945B) as an example, the interest-bearing return from November 2024 to March 2025 reaches 6.3%, with an annualized yield close to 8%.

The support point is that the U.S. non-investment grade bond default rate has dropped to 1.25%, far below the long-term average of 3.37%, but caution is needed regarding price volatility during the interest rate uptrend.

##Interest Rate Sensitivity and Allocation Strategy

The sensitivity of US Treasury ETFs to interest rate changes is mainly determined by the duration.

• Short-term instruments (BIL/SGOV): Duration less than 0.5 years, minimum interest rate risk, suitable for cash management or defensive allocation.
• Intermediate-term securities (VCIT/IEF): Duration of 5-7 years, balancing yield and volatility, able to advance during a rate cut cycle while also providing defense.
• Long-term varieties (TLT/00687B): Duration > 15 years, maximum interest rate elasticity, if the Fed cuts interest rates by 1%, the theoretical price increase can reach over 15%.

Configuration recommendations for August 2025:

• Expecting before the September rate cut: Increase holdings in short-term bond ETFs (SGOV/BIL) to lock in high yields and avoid fluctuations from the interest rate decision.
• After the interest rate cut is initiated: laddered allocation of long-term bond ETFs (such as TLT or 00795B), capturing the opportunity of yield curve steepening.
• Credit bond allocation: Use VCIT as the core holding, paired with non-investment grade bond ETFs (such as 00945B) to enhance portfolio returns.

##Differences in Rates and Tax Costs

Management Fee Difference:

• The issuance of ETFs in the United States has significant cost advantages, such as the Vanguard corporate bond series (VCIT/VCLT) with a fee rate of only 0.03%.
• The fee rate for U.S. Treasury bond ETFs issued in Taiwan is mostly between 0.15% and 0.45%, requiring careful calculation of the long-term compound interest impact.

Tax optimization options:

• In the Taiwan market, the smaller 00795B has fewer total holders, exempting it from withholding supplementary premiums.
• The US ETF needs to consider a 30% dividend withholding tax, but capital gains are tax-exempt, suitable for spread traders.

##Conclusion: Differences are Opportunities, Matching Demand is Key

The differences in the underlying assets of U.S. Treasury ETFs are essentially a puzzle game of risk and return characteristics. With the interest rate turning point window in August 2025, the portfolio needs to be dynamically adjusted:

• Defense Phase: Focus on short-term instruments like BIL, SGOV to manage Interest Rate risk
• Offensive allocation: After the rate cut begins, increase holdings in TLT, 00795B and other long-term bond ETFs to amplify capital gain potential.
• Yield enhancement: Pair with VCIT or 00945B to boost overall returns with credit spread.

Investors need to penetrate the ETF names, examine the underlying index rules, duration, and fee structure in order to transform U.S. Treasury ETFs into precise asset allocation tools.

Bloomberg data shows that the floating adjustment index lagged by an average of 7 basis points during the 2013 rate hike phase, but outperformed during the 2020 pandemic risk-averse period—subtle differences in the underlying assets are the "hidden variables" that ETF investors must pay attention to.