IGLB vs SCHQ: Corporate Bonds Beat Treasuries on Yield and Trailing Returns

Comparing the iShares 10+ Year Investment Grade Corporate Bond ETF (NYSEMKT:IGLB) and the Schwab Long-Term U.S. Treasury ETF (NYSEMKT:SCHQ) reveals distinct paths for long-duration exposure, contrasting corporate credit risk against government-backed security.

Both funds target the long end of the yield curve, but they serve different roles in a portfolio. While the iShares fund tracks investment-grade corporate debt to offer a yield premium, the Schwab fund focuses exclusively on U.S. Treasuries, representing the long-duration segment of the government bond market.

Snapshot (cost & size)

The Schwab fund is slightly more affordable with a 0.03% expense ratio. However, investors may prefer the iShares fund for its higher payout, as it currently offers a yield advantage of approximately 0.6 percentage points.

Performance & risk comparison

What's inside

The Schwab Long-Term U.S. Treasury ETF focuses on long-duration U.S. Treasury securities, holding 100 positions. Its largest positions include Treasury Bond 4.75% 02/15/2056 at 2.20% and Treasury Bond 4.75% 05/15/2055 at 2.20%. The fund is dedicated to government-backed securities, with sector exposure including 100.00% in cash and other treasury-related instruments. The fund was launched in 2019.

SCHQ has paid $1.47 per share over the trailing 12 months. On its recent $30.67 share price works out to a 4.80% yield.

The iShares 10+ Year Investment Grade Corporate Bond ETF provides exposure to high-quality corporate debt securities denominated in U.S. dollars. It is highly diversified across 3,823 holdings, and its largest positions are in diversified corporate issues, with no single position exceeding 0.29% of the portfolio. The fund tracks an index of corporate debt with maturities exceeding 10 years. The fund was launched in 2009.

IGLB has paid $2.61 per share over the trailing 12 months. At its recent $48.96 share price, the yield works out to 5.40%.

For more guidance on ETF investing, check out the full guide at this link.

What does this mean for investors?

These long-term bond funds are good choices for investors seeking higher income or return potential from lower rates. The latter shows the risk with these funds. If interest rates increase, the value of these funds would decline as they have over the last five years.

Despite its superior five-year return, IGLB carries a higher inherent risk since it tracks an index of investment-grade corporate bonds. The SCHQ has virtually zero credit risk since it invests in U.S. treasuries. Investors who want higher yields from long-term bonds while controlling risk may favor SCHQ.

That said, SCHQ has been the worst performer over the last five years, with a 28% decline compared to IGLB’s 13% loss at the time of writing. These declines include dividend reinvestment.

Some of the relative performance between these funds can be attributed to differences in each fund’s average duration. IGLB’s average duration across its holdings is currently 11.85 years, while SCHQ’s is 13.8 years. Longer durations mean higher sensitivity to swings in interest rates.

However, this also means SCHQ has the potential to outperform if interest rates fall.

Instead of trying to pick one, some investors may choose to hold both funds to benefit from IGLB’s higher dividend yield and the perceived safety of U.S. Treasuries with SCHQ.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.