Vanguard Short-Term Bond ETF vs Tax-Exempt ETF Key Differences

Investors seeking low-volatility fixed income often compare Vanguard Short-Term Bond ETF (NYSEMKT:BSV) and Vanguard Short-Term Tax-Exempt Bond ETF (NYSEMKT:VTES). While both funds target short-duration debt to mitigate interest rate risk, the primary distinction lies in their tax treatment and underlying security types. Choosing between them depends largely on an investor’s personal tax bracket and income needs.

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. Dividend yield is the trailing-12-month distribution yield.

The Vanguard Short-Term Bond ETF is slightly more affordable with a 0.03% expense ratio compared to 0.05% for the Vanguard Short-Term Tax-Exempt Bond ETF. Additionally, BSV offers a higher trailing dividend yield of 4.00% compared to 2.70% for VTES.

Performance & risk comparison

What’s inside

The Vanguard Short-Term Bond ETF follows the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This fixed-income fund holds 3,220 securities, primarily U.S. Treasury and corporate debt. Launched in 2007, it has a trailing-12-month dividend of $3.11 per share.

The Vanguard Short-Term Tax-Exempt Bond ETF tracks the S&P 0-7 Year National AMT-Free Municipal Bond Index with 3,286 municipal bond holdings. Launched in 2023, it has a trailing-12-month dividend of $2.78 per share.

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What this means for investors

Whether you’re investing with retirement on the horizon or rebalancing your portfolio for security amid the tech stock boom, you may be considering adding a bond ETF to your holdings. Short-term bonds are typically less interest-rate sensitive than long-term bonds and can provide reliable income at a pretty compelling dividend yield. Choosing between the Vanguard Short-Term Bond ETF and the Vanguard Short-Term Tax-Exempt Bond ETF will ultimately depend on whether you want a bit more income or a bigger tax break.

BSV provides exposure to both government and corporate debt. It has a higher dividend yield, a slightly higher recent return, and much larger assets under management. But any income or gains you make on the fund will be taxed at your normal rate. If you’re concerned about your tax burden, you may instead be interested in VTES, which holds only municipal bonds whose income is exempt from federal income tax. This approach gives you an extra layer of tax protection, though depending on where you live, you may still owe state taxes on your VTES income.

For most people, BSV will be the better bet for yield and liquidity. You’d have to have a lot of money invested in VTES to benefit from the tax exemption, but if you have a particularly high income or a large sum to invest and can fit the ETF into your tax strategy, it could pay off.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Bond Index Funds - Vanguard Short-Term Bond ETF. The Motley Fool has a disclosure policy.