VCIT vs. IEI Comes Down to What Job Your Bond Sleeve Is Doing

Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) and iShares 3-7 Year Treasury Bond ETF (NASDAQ:IEI) differ most in cost, yield, and portfolio composition -- VCIT offers a lower expense ratio and higher payout, while IEI focuses on U.S. Treasuries and shows lower historical drawdowns.

Both VCIT and IEI provide exposure to intermediate-term U.S. bonds, but with distinct strategies: VCIT emphasizes investment-grade corporate debt, while IEI tracks U.S. Treasury bonds in the three- to seven-year maturity range. This comparison unpacks how those choices play out across cost, risk, and portfolio makeup.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months.

VCIT looks substantially more affordable, with a 0.03% expense ratio compared to IEI’s 0.15%. VCIT also offers a higher yield, which may appeal to income-focused investors.

Performance & risk comparison

Growth of $1,000 reflects total return with dividends reinvested over the trailing five years; price-only performance was negative for both funds over the same period.

What's inside

IEI is a pure-play on intermediate-term U.S. government bonds, holding 83 Treasury securities with maturities between three and seven years. The largest allocations are to Treasury Notes maturing in 2029 and 2030, each around 3%. With a fund age of 19.3 years, IEI offers a focused, high-quality approach for those seeking government-backed debt and minimal credit risk.

VCIT, on the other hand, holds more than 340 investment-grade corporate bonds, with top positions in Meta Platforms Inc 4.88% 11/15/2035, Anheuser-Busch Cos LLC / Anheuser-Busch InBev Worldwide Inc 4.70% 02/01/2036, and Pfizer Investment Enterprises Pte Ltd 4.75% 05/19/2033. This corporate tilt may introduce higher yield but also more credit risk compared to IEI’s Treasuries. Neither fund introduces leverage, currency hedging, or other structural quirks.

What this means for investors

Don't read this as VCIT being the obvious pick just because it's cheaper and yields more. The two funds aren't really substitutes — they're answering different questions. VCIT holds investment-grade corporate debt, which carries credit risk Treasuries don't. That shows up in the drawdown numbers: VCIT fell 20.6% at its worst over the past five years, versus 13.9% for IEI. Beta tells the same story, with VCIT at 0.35 moving with stocks more than twice as much as IEI at 0.15. The 8.7% one-year return for VCIT versus 4.2% for IEI is the flip side of that same tradeoff.

One thing worth flagging: the modestly positive five-year total returns for both funds depend entirely on reinvested dividends. On a price-only basis, both ETFs are down over that stretch — the 2022 rate shock did real damage. If you're spending the income instead of reinvesting it, your principal has shrunk, and that changes how you should think about either fund as a long-term holding.

The useful question isn't which is better but what job your bond sleeve is doing. If it's there to cushion stock drawdowns, IEI's lower equity correlation is the point, and the lower yield is the cost of that ballast. If you're after income and can hold through volatility, VCIT's 4.7% payout and 0.03% expense ratio are tough to beat. Pick the behavior you want first, then let cost break the tie.

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

Seena Hassouna 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.