XBIL: 5.2% Yield And No Apparent Risk To Capital

Dividend stocks and bonds have been on a good run, but it can be difficult to buy after such a massive rally. For a start, the really juicy yields seen at the October lows are no longer available. Secondly, should there be a dip to re-test the lows it could cost you dearly. For instance, the iShares 20+ Year Treasury Bond ETF (TLT) has room to drop 15% and still be above the October low.

The US Treasury 6 Month Bill ETF (NASDAQ:XBIL) addresses both these concerns. The yield is around 5.2% and should stay around that level until the Fed starts cutting. Furthermore, you can’t really lose money on your purchase. Interested? Let’s take a closer look.

Introducing XBIL

XBIL started trading in March 2023 and is issued by the US Benchmark Series. It is a passively managed, single-bond fund that invests its assets ($520.07 million) in the most recently issued 6-month US Treasury Bill. Yes, it holds just one bond in its portfolio.

This may sound strange to some, but there is no need for diversity as the 6-month Bill is the one of the most liquid and safest bonds in the world. And whenever the newest Bill is issued, the ETF will roll its position into it. As per the fund’s prospectus:

“…[the fund] seeks to achieve the UST 6 Month Bill Fund’s investment objective by investing at least 80% of the UST 6 Month Bill Fund’s net assets (plus any borrowings for investment purposes) in the component securities of the Underlying Index, provided, however, that in the event that the most recently auctioned outstanding Treasury Bill that matures closest to, but not beyond, six months from the rebalancing date is not included in the Underlying Index, then the UST 6 Month Bill Fund will invest at least 80% of its net assets (plus any borrowings for investment purposes) in the most recently auctioned outstanding Treasury Bill that matures closest to, but not beyond, six months from the rebalancing date.”

This happens around once a week. Hera are the details of the next auction on 16th January.

Of course, you could do this yourself, but it is a lot of hassle and not an easy process. XBIL has a relatively high expense ratio of 0.15%, but that is the price you pay for the convenience and being able to hold the bond in an ETF alongside the rest of your income portfolio.

The composition of the ETF does mean there will be a drag from the high turnover of Bills the fund has to buy and sell. From the prospectus.

“A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when UST 6 Month Bill Fund Shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the UST 6 Month Bill Fund’s performance.”

This is a slight concern. The costs could be revealed, but aren’t.

“In accordance with industry practice, derivative instruments and instruments with a maturity of one year or less at the time of acquisition are excluded from the calculation of the portfolio turnover rate, which leads to the 0% portfolio turnover rate reported above.”

Since XBIL has not traded for a full year, there is no information yet on performance. It will be interesting to see if the transaction costs and other factors drag on the performance, but the overall impact should be negligible.

The Yield

One thing to note is that XBIL dividend yield (TTM) as shown on Seeking Alpha and other sites is an unimpressive 4.30%. However, this is the trailing twelve month dividend yield and therefore contains lower distributions from early 2023 before the Fed hiked to its current 5.25-5.50% range.

The TTM yield is therefore misleading. XBIL pays monthly and its last distribution was $0.21967 which was paid on the 29th December. With a share price of $50, this yielded 0.43934% which is 5.272% annualized.

Here’s a chart of 6-month T-Bill yields which should give you a good idea of how much XBIL yields.

The yield has dropped in recent months due to the Fed’s dovish shift and the expectation of rate cuts, but much less than the yields of longer-term bonds. Since the Federal Funds Rate is 5.25%-5.50%, 6-month T-Bills should not go much below 5.25%.

Of course, the yield will drop each time the Fed cuts, and vice versa. This is obviously a big issue in 2024 as the market expects up to 150bps in cuts. However, with a strong labor market and CPI at 3.4%, a March cut looks unlikely. A cut in May is possible, but some FOMC members such as Atlanta Fed President Raphael Bostic see cuts as late as Q3.

The risk is cuts come sooner rather than later, but worst case scenario is the dividend yield will be cut by 25bps, or however much the Fed cuts. The chart below shows the last cutting cycle, which was extreme. Even then, the 6-month followed the Fed Funds Rate lower and there was time to get out.

Should you want to “get out” of XBIL because the Fed starts cutting or for any other reason, there should be absolutely no problem. Daily volume of an average of around 180k means $9m is traded each day and liquidity is ample. Moreover, as shown in the next section, you won’t lose your capital.

The Share Price

XBIL hovers around the $50 level, dropping to a low of around $49.92 after each distribution and rising to a high around $50.16 as the dividend accrues.

XBIL therefore trades like a bill that matures at $50 every month. There is very little danger to your capital, although we can never say an investment is absolutely risk free. The prospectus lists out the usual risks associated with holding an ETF which invests in USTs.

Conclusion

XBIL is a very interesting ETF which provides easy access to 6-month T-Bills. Yes, the yield is very likely to drop later this year when the Fed eventually cuts rates, but we don’t know when that will be. Meanwhile, you can pick up around a 5.2% yield which is paid monthly.

Most importantly, because XBIL trades like a UST, you should be able to sell with minimal capital loss whenever you want.