Which Vanguard Bond ETF Should You Choose, BND or VGIT?

Ever since the Fed concluded its aggressive rate-hiking cycle in 2023, fixed income is no longer an asset class to be ignored. Even ultra-short, risk-free three-month Treasury bills are offering yields north of 3.5% right now. That makes it a viable asset class to consider as part of a broader portfolio.

The better question might be how to approach investing in fixed income.

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In my opinion, the two best ways to invest are:

• Short-term Treasuries: This would be the more defensive, risk-off play that still pays a decent yield. It might be more appropriate if you’re expecting a deeper bear market.

• Total bond market: This would be more of a traditional asset allocation play. This could be used as part of a larger portfolio for long-term investing.

Within the Vanguard lineup, that means we’re looking at the Vanguard Short-Term Treasury ETF (NASDAQ: VGSH) and the Vanguard Total Bond Market ETF (NASDAQ: BND).

You could make a case for either, but I would personally choose one over the other.

The Vanguard Short-Term Treasury ETF invests primarily in high-quality U.S. Treasury bonds with a dollar-weighted average maturity of one to three years. It currently yields 3.6%.

The Vanguard Total Bond Market ETF provides broad exposure to the investment-grade bond market, including Treasuries, corporate bonds, and mortgage-backed securities (MBS). It currently yields 4.2%.

Both offer fairly plain vanilla coverage of their target markets and come with low expense ratios of 0.03% — a hallmark of Vanguard funds. Each would be a top-tier choice within their respective spaces.

This ETF could easily serve solely as an ultra-low-risk income vehicle. It has the double benefit of acting as a counterbalance to a sharp correction in equity prices.

In many cases, Treasuries have an inverse correlation with stocks, meaning their prices tend to rise when stock prices fall. Because of that, they’re often considered a risk hedge and downside protection tool for a portfolio.

One scenario in which they may not work, however, is in an inflationary environment. This is what we saw during 2022. Soaring inflation, coupled with rising interest rates, led to stock and bond prices falling simultaneously. Just when investors needed Treasury protection, it didn’t happen.

Since this ETF offers broad bond exposure across numerous categories, it probably serves better as a core portfolio allocation than as a pure risk-off tool.