Vanguard Intermediate-Term Treasury ETF (VGIT)

A Treasury bond is debt issued by the US government. When investors lend to Washington by buying Treasuries, they get interest payments and the certainty that the US government, with its tax authority and currency-printing powers, will repay. A Treasury fund lets you own a diversified portfolio of these bonds across different maturities. The Vanguard Intermediate-Term Treasury ETF holds bonds in the sweet spot — not short-term, where yields are minimal, and not decades-long, where price swings are severe.

The US Treasury market and where VGIT sits

The US issues Treasury debt across a spectrum of maturities, from three-month bills up to 30-year bonds. Each maturity offers a different yield and interest-rate sensitivity. Short-term Treasuries (under three years) offer low yields but almost no price volatility. Long-term Treasuries (20 years and beyond) offer higher yields but swing wildly when rates change. Intermediate-term Treasuries (three to ten years) are the middle ground — more yield than short-term debt, but less price volatility than long-term bonds.

VGIT tracks the Bloomberg U.S. 3–10 Year Treasury Index, which includes all Treasury securities in that maturity range. Unlike a corporate bond fund that has to pick among thousands of different issuers, a Treasury fund simply holds the government debt that exists in that maturity bucket. The index is rebalanced as bonds age and mature, with no trading needed beyond that passive adjustment. Vanguard’s fund follows that index closely, meaning you own a slice of the entire intermediate Treasury market.

How Treasury bonds work and why they matter

When you buy a Treasury bond, you are lending to the US government. The government promises to pay you interest (the coupon) semi-annually and return your principal on the maturity date. If you buy a bond maturing in five years at a 4.5 percent coupon, you get 4.5 percent of the bond’s face value each year for five years, then your principal back at the end.

If you hold the bond to maturity, you know exactly what you will get back — interest and principal, barring an unprecedented US default. But Treasury bonds trade actively before maturity, and their prices move inversely to interest rates. If you buy a bond yielding 4.5 percent and rates rise to 5 percent, your bond is worth less on the secondary market (because new buyers can get 5 percent elsewhere). If rates fall to 4 percent, your bond becomes more valuable. The longer the maturity, the larger that price swing — a one-percentage-point rate rise hurts a 30-year bond far more than a 5-year bond.

VGIT avoids both extremes. The duration is moderate — typically around six to seven years — so a one-percentage-point rate rise causes roughly a six to seven percent price decline, which is material but not catastrophic. This middle ground makes the fund suitable for investors who want more yield than they would get from short-term bonds, but who want to sleep at night without worrying about severe price swings if the Federal Reserve tightens policy.

Ownership and who holds VGIT

Treasuries are held by everyone: the Federal Reserve, foreign central banks, insurance companies, pension funds, and individual investors. VGIT itself is owned by a diverse mix of retirees, conservative investors building fixed-income allocations, and institutions using it as ballast in larger portfolios. Because Treasuries are the safest credit you can buy, VGIT attracts investors who prioritize safety over yield.

The fund is equally useful in taxable accounts and retirement accounts, though Treasuries have a subtle tax advantage: the interest you earn on Treasuries is exempt from state and local income taxes (though still subject to federal income tax). That advantage is often overstated — it is valuable only if you live in a high-tax state and hold the fund in a taxable account — but it is real.

Duration, convexity, and interest-rate mechanics

The fund’s sensitivity to rates is governed by its duration, which measures price change relative to interest-rate changes. VGIT’s duration is usually in the six to seven-year range, meaning a one-percentage-point rate increase causes roughly a six to seven percent price decline. That relationship is approximate, not exact, because of a subtlety called convexity — the fact that the price-to-yield relationship is curved, not a straight line. For Treasuries held for the medium term, this difference is small and not worth worrying about.

What matters is that if rates rise sharply, VGIT’s price falls — but not catastrophically. If rates fall, the price rises. For someone invested for five to ten years, this volatility is manageable. For someone who needs the cash in a year or two, this volatility is a real risk.

Costs and income generation

The fund’s expense ratio is minimal. Vanguard is known for low-cost index funds, and Treasury funds are among the cheapest to operate because there are no stock-picking costs — you just hold the index. The yield (interest paid out) varies with the overall Treasury yield curve; when rates are high, the distribution is high, and vice versa.

Distributions are usually made semi-annually or quarterly. The income is taxed as federal ordinary income (not capital gains) and is subject to state and local taxes in most states, unlike the interest income from the Treasuries themselves.

Risks and why they matter

Default risk is negligible. The US government has never defaulted on its Treasury obligations, and the probability is so low that it is not a factor in investment decisions. If you are worried about a US Treasury default, you should be building a bunker, not buying bonds.

Interest-rate risk is the real risk. If you buy VGIT and rates rise significantly over the next year or two, the fund’s value falls. If you need to sell before maturity, you lock in a loss. But if you hold it to maturity or stay invested through the cycle, you earn your promised coupon rate regardless of what happened to prices in between.

Inflation risk is structural. If unexpected inflation accelerates, the fixed coupon payments the Treasuries pay are worth less in real (inflation-adjusted) terms. Treasuries are not a hedge against inflation; they are a hedge against economic downturns, when yields tend to fall and bond prices rise.

Call risk does not exist for Treasuries — they cannot be called early. Once you own them, the government cannot refinance them away from you before maturity (though it can refund them, selling new ones to replace the old at the maturity date).

Duration risk from reinvestment is subtle. As coupons are paid, you reinvest the cash in whatever the current yield is at that moment. If rates fall, you reinvest at lower yields. If rates rise, you reinvest at higher yields. Over a full market cycle, this balances out, but in any given period it matters.

How to research it

The fund fact sheet lists the holdings (though for Treasuries, the critical facts are just the maturity spectrum and the weighted-average maturity and duration). The US Treasury website publishes the yield curve daily, showing rates for three-month, two-year, five-year, ten-year, and thirty-year Treasuries. That curve tells you the landscape of what the fund is invested in. The Bloomberg U.S. Treasury Index is published daily, and you can compare the fund’s performance to the index to verify it is tracking closely. For deeper research, the US Treasury publishes the schedule of upcoming auctions and maturities, which tells you how new supply is entering the market and when existing bonds are maturing out of the fund.