Neonatal HIV-1 infection is associated with rapidly progressive and frequently fatal immune deficiency if left untreated. Immediate institution of antiretroviral therapy (ART), ideally within hours after birth, may restrict irreversible damage to the developing neonatal immune system and possibly provide opportunities for facilitating drug-free viral control during subsequent treatment interruptions. However, the virological and immunological effects of ART initiation within hours after delivery have not been systematically investigated. We examined a unique cohort of neonates with HIV-1 infection from Botswana who started ART shortly after birth and were followed longitudinally for about 2 years in comparison to control infants started on treatment during the first year after birth. We demonstrate multiple clear benefits of rapid antiretroviral initiation, including an extremely small reservoir of intact proviral sequences, a reduction in abnormal T cell immune activation, a more polyfunctional HIV-1-specific T cell response, and an innate immune profile that displays distinct features of improved antiviral activity and is associated with intact proviral reservoir size. Together, these data offer rare insight into the evolutionary dynamics of viral reservoir establishment in neonates and provide strong empirical evidence supporting the immediate initiation of ART for neonates with HIV-1 infection.