Why Short-Term Treasuries Like VGSH May Outperform Equities Over the Next Decade

In the current high-interest-rate environment, investors face a critical choice between equities and short-term Treasuries. While equities have historically delivered higher returns, the interplay of duration risk, cost efficiency, and macroeconomic resilience now tilts the balance toward short-term Treasury ETFs like the Vanguard Short-Term Treasury ETF (VGSH). This analysis explores why such instruments may outperform equities over the next decade, supported by empirical data and macroeconomic trends.

Duration Risk: A Structural Advantage for Short-Term Treasuries

Duration risk—the sensitivity of bond prices to interest rate changes—remains a defining factor in asset allocation. Short-term Treasuries, particularly those with maturities under two years, exhibit minimal duration risk. For instance, after the Federal Reserve's initial rate cut in 2024, the 10-year Treasury yield paradoxically increased, while short-duration high-yield bonds returned 0.7% during the same period Fed Rate Cuts & Potential Portfolio Implications | BlackRock^[1]. This underscores the reduced volatility of short-term instruments in a shifting rate environment.

The U.S. Treasury's strategic issuance of short-term bills has further stabilized bond markets. By prioritizing short-duration debt, the government has mitigated upward pressure on long-term yields, preserving the relative stability of short-term Treasuries How Changing Interest Rates Impact the Bond Market^[2]. In contrast, equities face heightened exposure to macroeconomic variables. The S&P 500's recent resilience, for example, has been uneven, with large-cap tech stocks underperforming global peers amid inflationary pressures and regulatory scrutiny Navigating Rate Risks: How Bonds Are Better Positioned In 2025^[3].

Cost Efficiency: Low-Cost Income Generation

Short-term Treasury ETFs like VGSH offer unparalleled cost efficiency. With an expense ratio of 0.03% and a 30-day SEC yield of 4.2%, VGSH exemplifies the affordability of fixed-income strategies in 2025 Vanguard Short-Term Treasury ETF (VGSH)^[4]. This compares favorably to active equity ETFs, which typically charge 0.45% or more, reflecting higher operational and trading costs 2025 Investment Management Outlook | Deloitte^[5].

Equities, while historically less costly to trade than alternatives like private equity, face rising transaction costs in high-rate environments. Market volatility and earnings compression—exacerbated by inflation and policy uncertainty—have increased the cost of equity ownership Why More Plan Administrators Are Turning to Alternatives^[6]. Meanwhile, short-term Treasuries benefit from structural advantages, including floating-rate features and high liquidity, which reduce transaction frictions TBIL: Nevermind The Lower Rate Outlook^[7].

Macroeconomic Resilience: Navigating a Shifting Landscape

The macroeconomic backdrop further strengthens the case for short-term Treasuries. The Federal Reserve's 4.25%–4.50% federal funds target rate, maintained despite market expectations of two rate cuts by year-end 2025, has flattened the yield curve Fixed Income Outlook: Cool and Cloudy^[8]. This environment favors short-term instruments, which avoid the underperformance risks of long-term bonds in a rate-cutting cycle.

Equities, though resilient in the short term, face structural headwinds. The S&P 500's recovery post-December 2024—spurred by favorable inflation data—masked broader fragilities, including sectoral imbalances and global growth concerns 2025 Corporate Bond Market Trends: An Investor's Guide^[9]. High-yield bonds, by contrast, have outperformed equities in risk-adjusted returns, offering income potential with lower volatility Credit Futures: The Risk-Returns of Investment-Grade and High-Yield Bonds^[10].

Conclusion: A Strategic Reorientation

The convergence of low duration risk, cost efficiency, and macroeconomic resilience positions short-term Treasuries as a superior long-term investment. As central banks navigate a complex policy landscape, investors must prioritize instruments that balance yield, stability, and adaptability. Short-term Treasury ETFs like VGSH not only hedge against interest rate uncertainty but also provide a cost-effective, income-generating alternative to equities—a critical consideration in an era of prolonged high rates.