A recent Wall Street Journal article, “Wealth Management Has a $3 Trillion Problem: Investors Are Keeping Too Much Cash,” describes a gap between financial advisers, who are encouraging clients to move money from cash into bonds and other investments, and clients who continue to favor money-market funds. But the relevant choice need not be cash versus a bond fund. Investors seeking fixed-income exposure can also build a ladder of individual Treasury securities and hold them to maturity. This paper asks whether that approach would have produced better results than a passive Treasury ETF.
We tested these questions using 20 years of historical interest-rate data, from January 2006 through December 2025. Each strategy received $1,000 every month, for total contributions of $240,000.
The basic Treasury ladder divided new money among six maturities: 3 months, 6 months, 1 year, 2 years, 5 years, and 10 years. As a passive-fund alternative, we used SHY, the iShares 1–3 Year Treasury Bond ETF, including reinvested distributions.
We then tested whether the ladder could be improved by selectively omitting the 10-year rung. The modified bond ladder involved:
· Use all six rungs whenever the 10-year Treasury yield is at least 4.0%.
· Use all six rungs if the 10-year bond yield falls below 4.0 percent but remains more than 70 basis points over the 5-year bond yield.
· Otherwise use a five-rung ladder with the 10-year step omitted.
What happened?
After 20 years and $240,000 of contributions:
70-basis-point adaptive Treasury ladder: approximately $302,854
Always-six-rung Treasury ladder: approximately $296,900
SHY Treasury ETF: approximately $284,900
The adaptive ladder finished roughly $6,000 ahead of the mechanical ladder and $18,000 ahead of the ETF.
The ETF’s last-place finish is the most important result. A low-cost Treasury bond fund did not replicate the results of periodically purchasing and holding individual Treasury securities.
The result held for a more restrictive decision rule on the purchase of 10-year bonds in a low-rate environment. The more restrictive rule – purchase all six rungs when the 10-year-5-year spread was over 90 basis points resulted in 10 fewer purchases of the 10-year bond and almost the same exact wealth balance after 20 years.
The broadest finding is that an investor-constructed Treasury ladder can outperform a passive Treasury bond fund. A second finding is that actively managed bond purchase rules can potentially outperform the purchase of the same ladder regardless of the interest rate environment.
A related paper, Is the 30-Year Treasury Yield Really That Attractive?, examines whether today’s long-term Treasury yields look unusually attractive only because recent comparisons begin during the exceptionally low-rate post-2007 period. The next step is to extend the simulations here to additional portfolios, including portfolios with 30-year Treasuries and other fixed-income assets, and to compare individual-security strategies with bond ETFs that accumulated longer-duration bonds during the unusually low interest-rate environment surrounding COVID.
Appendix: Data and Methodology
Period and contributions. The test covers January 2006 through December 2025. Each strategy receives $1,000 every month, producing $240,000 of total contributions.
Interest-rate observations. Treasury decisions are based on the last available business-day Treasury yield for each month, rather than the monthly-average yield.
Individual Treasury purchases. Each purchase is treated as a separate Treasury position. Securities already owned are held to maturity and are not sold because interest rates change or because the allocation rule subsequently changes.
Reinvestment. New monthly contributions, coupon payments, and principal from maturing securities are invested according to the rule prevailing at the exact time the maturity reaches maturity.
Bond ladder composition: The six-rung ladder involves equal purchases of all six securities. The five-rung ladder involves equal purchases of the five shorter securities – with the 10-year maturity omitted.
Treasury data. The ladder uses historical Treasury market yields at the relevant maturities to construct synthetic par Treasury purchases. This allows a consistent 20-year simulation, but it is not a CUSIP-by-CUSIP reconstruction of every Treasury auction or secondary-market transaction.
ETF comparison. SHY is evaluated using historical total returns, including distributions, so the ETF result incorporates both price movements and reinvested income.
These assumptions are intended to put the strategies on as comparable a footing as practical. The calculations should be viewed as a historical simulation rather than a claim that an investor could have reproduced every reported dollar exactly in real-world trading.
Author’s Note
This paper extends a series of articles on fixed-income portfolio design, inflation protection, and the choice between individual securities and bond funds. Related articles include:
• Mistakes made by many fixed-income investors
• How to protect workers from inflation
• Series I Bonds vs. Bond Funds: 27 Years of Head-to-Head Results
• How best to expand investment opportunities inside retirement accounts and other portfolios?