Among the many too-good-to-be-true financial stories is the Alpha Architect 1-3 Month Box ETF, known by its ticker (BATS:BOXX), that offers Treasury bill yields taxed at capital gains rates. For some investors that could mean paying a 20% tax on returns rather than 37% — a “saving” that’s helped draw some $1 billion in assets to the fund.
There have also been a series of warnings. Steven Rosenthal, a senior fellow in the Urban-Brookings Tax Policy Center, thinks the tax benefits will not stand up. Elm Partners Management’s Victor Haghani and James White point out that the tax benefits will be smaller for most investors, and can even be negative. Moreover, they say that even with the full tax benefit the risk-adjusted return of BOXX is inferior to holding Treasury bills or money market funds.
I have a different objection: it doesn’t make sense to want an investment that beats the long-term total return of Treasury bills on an after-tax basis, because Treasury bills are a terrible long-term investment in the first place. The only reasons to hold liquid, short-term, low-risk investments like Treasury bills and money market funds are for cash you might need suddenly, or sitting out risk temporarily.
You pay a tremendous cost in yield for liquidity and safety, greater than the difference between 37% and 20% tax rates.
Consider the strategy of buying five-year Treasury notes versus rolling 13-week Treasury bills. Going back to Sept. 1, 1981, the five-year note has almost always delivered a better pre-tax total return. At a yield of 4.06% (the level early Monday), a five-year note will deliver a minimum 20.3% total pre-tax return over five years, compared with a historical total return of between 2% to 18% for rolling 13-week Treasuries.
I admit this is not entirely fair. I didn’t cherry-pick my data, but the Federal Reserve numbers only go back to 1981. In some years in the 1970s when interest rates were going up rapidly, rolling 13-week bills beat the five-year. Also, if you bought the note at the pandemic low yield of 0.19% on Aug. 4, 2020, you would have lost to Treasury bills by Aug. 4, 2025 — something that’s not in the chart above.
Still, it’s fair to say that an investment in rolling 13-week bills almost always loses pre-tax compared to buying a five-year note, and it often loses by quite a bit.
Read the full article here by Aaron Brown of Bloomberg News, Advisor Perspectives
