LQD vs TLT: How Do These Two Popular Fixed Income ETFs Compare?

The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) offers targeted exposure to long-dated government debt, while the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEMKT:LQD) provides broad access to investment-grade corporate bonds.

This analysis considers how investors might choose between government and corporate debt based on risk tolerance. While both funds are managed by BlackRock (NYSE:BLK), they respond differently to economic shifts and credit spreads, making the choice between TLT and LQD a matter of strategic positioning.

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 expense ratios for these funds are nearly identical, with a negligible 0.01 percentage point difference. Both ETFs currently offer a 4.6% yield, providing comparable income streams despite their different underlying assets and risk profiles.

Performance & risk comparison

What's inside

The iShares 20+ Year Treasury Bond ETF is a fixed-income fund that holds 46 holdings, primarily U.S. Treasury securities with maturities exceeding 20 years. Because it is a bond fund, it does not provide an equity sector breakdown. The fund was launched in 2002. iShares 20+ Year Treasury Bond ETF has paid $3.90 per share over the trailing 12 months, which, at its recent ~$84.36 share price, yields 4.6%.

The iShares iBoxx $ Investment Grade Corporate Bond ETF provides access to the corporate debt market. As a fixed-income fund, it does not provide a traditional equity sector breakdown. The fund was launched in 2002. iShares iBoxx $ Investment Grade Corporate Bond ETF has paid $4.94 per share over the trailing 12 months, which, at its recent ~$107.67 share price, yields 4.6%.

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Which looks like the better buy

The iShares 20+ Year Treasury Bond ETF (TLT) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) are both fixed-income exchange-traded funds (ETFs), but they differ significantly across several factors. Here’s how they stack up against one another.

First, let’s take a closer look at TLT. The fund is one of the largest in the ETF universe, with over $41 billion in AUM, ranking it 68th-largest. In short, TLT provides investors with exposure to the U.S. Treasury debt market. This will appeal to income-seeking investors in general, and risk-averse ones in particular. Since U.S. Treasuries are backed by the U.S. government, credit risk is limited, so the main risk in investing in TLT comes from interest-rate risk. That is to say, if interest rates rise, TLT will almost certainly underperform, given its vast holdings of long-dated U.S. Treasury bonds.

Then, there’s LQD. This fund focuses on the corporate bond market. These are bonds issued by corporations to fund their operations. Specifically, LQD zeroes in investment grade issuers (those corporations with the highest credit ratings). Since corporate bonds introduce some level of credit risk (the risk that an issuer might delay repayment, restructure, or otherwise default), corporate bonds tend to yield more than U.S. Treasury debt. Like TLT, LQD is one of the largest ETFs, with over $35 billion in AUM, ranking it 81st.

To sum up, TLT and LQD both provide investors with easy access to fixed-income products. Both funds are affordable, with TLT boasting an expense ratio of 0.15% and LQD at 0.14%. What’s more, both funds rank among the top 100 in AUM — a testament to their overall popularity. Nonetheless, both TLT and LQD are designed for fixed-income investors. As a result, their overall performance pales in comparison to most equity ETFs. Indeed, since 2006, TLT has generated a compound annual growth rate (CAGR) of only 3.2%, while LQD has a 4.3% CAGR. By contrast, the S&P 500 has a CAGR of 11.3% over this same period. In short, while both funds can serve as income sources for income-seeking investors, neither is a match for every portfolio.

Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends BlackRock. The Motley Fool has a disclosure policy.