LQD Offers Broader Bond Exposure Than VCLT, But With Higher Fees and Lower Yield

Both the Vanguard Long-Term Corporate Bond ETF (NASDAQ:VCLT) and the iShares iBoxx Investment Grade Corporate Bond ETF (NYSEMKT:LQD) focus on investment-grade U.S. corporate bonds, but they differ in maturity range, diversification, and cost structure, making them suitable for different types of fixed-income investors.

Snapshot (cost & size)

Beta measures a fund’s price volatility relative to the S&P 500.

VCLT offers lower fees thanks to its 0.03% expense ratio, giving it a notable edge over LQD’s 0.14%. It also delivers a higher payout, with a 5.37% dividend yield versus LQD’s 4.35%.

Performance & risk comparison

What's inside

VCLT holds 1,797 bonds, focusing on long-term, investment-grade corporate debt with maturities ranging from 10 to 25 years. Around 68% of the holdings are issued from the industrials industry, followed by finance at 17% and utilities at around 14%. It applies an ESG screen, which may appeal to those seeking responsible investing tilts. The fund has a track record of nearly 16 years.

LQD, in contrast, spreads assets across 2,998 holdings, offering much broader exposure to the U.S. investment-grade corporate bond market. Compared to VCLT, this fund's strategy is more diversified. Its most heavily weighted exposure is banking at around 23%, followed by consumer non-cyclical at 18% and technology at 12%. It also has a longer track record of around 23 years.

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Foolish take

VCLT and LQD can both be strong investments fitting a variety of portfolios, and they share many similarities. Where they differ, though, lies primarily in their diversification and investment goals.

VCLT is more targeted than LQD, with fewer holdings and less diversification across market sectors. A more concentrated approach can sometimes result in higher returns, but it can also lead to increased volatility -- which is evident in this fund's higher beta, more severe max drawdown, and lower one-year total returns.

While LQD can offer more stability with greater diversification and less price volatility, it also has a higher expense ratio and lower dividend yield than VCLT. In deciding where to buy, investors will have to consider their priorities in terms of risk protection versus dividend income and savings on fees.

Glossary

ETF: Exchange-traded fund; a pooled investment fund that trades on stock exchanges like a stock.
Expense ratio: The annual fee, as a percentage of assets, that a fund charges its shareholders.
Dividend yield: Annual dividends paid by a fund divided by its current price, shown as a percentage.
Beta: Measures a fund's volatility compared to the overall market, typically the S&P 500.
AUM: Assets under management; the total market value of assets a fund manages for investors.
Max drawdown: The largest percentage drop from a fund's peak value to its lowest point over a period.
Investment-grade: Bonds rated as relatively low risk of default by credit agencies, typically BBB/Baa or higher.
Corporate bond: A debt security issued by a corporation to raise capital, paying interest to investors.
ESG screen: A filter that excludes companies not meeting certain environmental, social, or governance criteria.
Diversification: Spreading investments across various assets to reduce overall risk.
Maturity: The length of time until a bond's principal is repaid to investors.

Katie Brockman 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.