Conservative fixed-income investors may prefer the Vanguard Short-Term Bond ETF (NYSEMKT:BSV) for its Treasury exposure, while the Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) offers a higher yield by concentrating on corporate debt.
Short-term bonds often serve as a volatility buffer in a diversified portfolio, providing better returns than cash without the significant price swings associated with long-term debt. Investors comparing these two Vanguard offerings are typically deciding between the relative safety of government-backed securities and the slightly higher income potential found in corporate notes.
Both funds target the one- to five-year maturity segment, providing a balance of stability and income that may appeal to those with shorter time horizons.
Snapshot (cost & size)
Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.
Both funds are extremely affordable with identical 0.03% expense ratios. However, investors receive a higher payout from the corporate-only fund, which provides a trailing-12-month yield approximately 0.44 percentage points higher than its government-inclusive counterpart.
Performance & risk comparison
The Vanguard Short-Term Bond ETF aims to replicate the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This strategy involves holding a broad mix of 3,205 positions, including U.S. government bonds, international issues, and high-quality corporate credit. Its largest positions include United States Treasury Note/Bond 4.13% 06/30/2031 at 1.19% and United States Treasury Note/Bond 3.50% 01/31/2028 at 1.12%. The fund was launched in 2007. The Vanguard Short-Term Bond ETF has paid $3.12 per share over the trailing 12 months, which on its recent ~$77.40 share price works out to a 4.00% yield.
The Vanguard Short-Term Corporate Bond ETF targets investment-grade corporate debt with maturities between one and five years. It maintains a massive portfolio of 3,023 holdings, ensuring that single-issuer risk is minimized. The fund generally offers higher interest rates to compensate for credit risk. Its holdings are highly diversified, and no individual position exceeds 0.94% of the total assets. The fund was launched in 2009. The Vanguard Short-Term Corporate Bond ETF has paid $3.51 per share over the trailing 12 months, which on its recent ~$78.41 share price works out to a 4.50% yield.
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What this means for investors
Vanguard is known for its low fees, and short-term bonds provide a place to park your cash for higher yields than money market funds. This combination makes the Vanguard Short-Term Bond ETF (BSV) and Vanguard Short-Term Corporate Bond ETF (VCSH) compelling investment choices. Which to pick depends on your level of risk tolerance.
VCSH offers a higher dividend yield in exchange for elevated risk, as demonstrated by its greater five-year max drawdown. Because it maintains a small percentage of government bonds, which comprise just 0.39% of the fund, the vast majority of the ETF’s return comes from corporate bonds. About 54% of VCSH’s holdings are A-rated bonds and above. However, over 45% are BBB-rated bonds, which are still investment grade but carry greater risk.
BSV is for the conservative investor prioritizing capital preservation above a dividend yield. About 70% of the ETF’s holdings are in U.S. government bonds with the remainder comprising corporate debt. Its massive AUM of nearly $70 billion indicates it’s a popular fund, although both BSV and VCSH possess great liquidity.
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Which Is the Better Vanguard Short-Term Bond ETF, Corporate Bond-Focused VCSH or BSV’s Treasury Emphasis? was originally published by The Motley Fool
