In a year in which top-performing funds are risky, volatile bear funds like ProShares Ultrashort Semiconductor ETF (NYSE:SSG), and in which commodity funds like SPDR Gold Shares (NYSE:GLD) have barely eked out a positive return, few investments have matched the allure of U.S. Treasury bonds. Bill Gross, the legendary bond investor, once said "I still prefer an overvalued Treasury to an overvalued stock."

The time to test that theory seems to be at hand: The investor run on Treasuries has driven their prices ever higher, and their yields may be approaching levels that make them seem hardly worth holding. Nevertheless, Treasury bonds do provide a measure of safety and a look at three exchange-traded funds (ETFs) covering the Treasury market identifies a fund that is a good option for these trying times.

Fund specifics
Three funds that cover a broad spectrum of Treasuries are the iShares Lehman 1-3 Year Treasury (AMEX:SHY), iShares Lehman 7-10 Year Treasury (AMEX:IEF), and iShares Lehman 20+ Year Treasury (AMEX:TLT). The three funds track the short-, intermediate-, and long-term sectors of the United States Treasury market respectively, and each has an expense ratio of 0.15%.

Fund facts


YTD Return

3-Year Average Return

30-Day SEC Yield






$7.8 billion





$3.1 billion





$1.8 billion

Source: iShares. Returns as of Oct. 31.

Fund prospects and risks
Treasury securities are one of the safest investment options because they have the government's guarantee of timely interest and principal payments. That does not mean an investment in these securities is a guarantee against losses though, as they come with interest rate and inflation risk. If interest rates rise, underlying ETF share prices will fall. And with interest rates falling to levels not seen in 50 years, it seems unlikely that rates paid by the bonds could fall much further.

Portfolio fit?
When fear rules the market -- as it has in recent months -- investors look for safety anywhere they can find it. That's why U.S. Treasuries make sense for a portion of your portfolio.

If you focus on the shorter-term Treasuries, you will have a highly liquid, quality security with much less interest rate risk than the longer-term ETFs. If interest rates increase, short-term Treasury securities will not lose as much value as their long-term peers.

It is wise to keep an eye on any allocation to Treasury securities as they are affected by supply and demand, and right now the demand side of the equation is out of balance. Although stocks may be undervalued, until market sentiment changes, investors will stay close to Treasuries.

Once the tidal wave of fear washes through the economy and beaten-down assets begin to look more attractive, you would be well-advised to consider moving out of this safe haven quickly and taking advantage of what may be once-in-a-lifetime prices in the stock market.

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Fool contributor Zoe Van Schyndel lives in the Seattle area, where she enjoys the coffee and natural wonders. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.