Which Is the Better Short-Term Bond ETF, Vanguard's VTES or VanEck's SMB?

The VanEck Short Muni ETF (NYSEMKT:SMB) and Vanguard Short-Term Tax-Exempt Bond ETF (NYSEMKT:VTES) both target the short-end of the municipal bond market, offering federal tax-exempt income with low volatility.

Investors seeking to park cash in a tax-advantaged way often look to short-duration municipal bonds. These funds provide a buffer against interest rate swings while keeping money accessible. While they share similar goals of providing federal tax-exempt income, differences in issuer scale, expenses, and portfolio depth distinguish the two options.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Vanguard fund maintains a slight cost advantage with a 0.05% expense ratio compared to 0.07% for the VanEck fund. This cost efficiency is a hallmark of Vanguard indexing, though the VanEck fund has recently provided a marginally higher trailing payout for yield-focused investors.

Performance & risk comparison

What's inside

The VanEck Short Muni ETF tracks the ICE Short AMT-Free Broad National Municipal Index, focusing on short-duration, tax-exempt municipal bonds. Its largest positions include the New York City Transitional Finance Authority at 1.05%, Indiana Finance Authority at 1.03%, and Charlotte-Mecklenburg Hospital Authority at 1.03%. The fund holds 335 securities. It was launched in 2008. It utilizes an ESG screen to filter its holdings. The VanEck Short Muni ETF has paid $0.48 per share over the trailing 12 months, which on its recent ~$17.27 share price works out to a 2.8% yield.

The Vanguard Short-Term Tax-Exempt Bond ETF is a fixed income fund, tracking the S&P 0-7 Year National AMT-Free Municipal Bond Index. The fund is highly diversified, holding 3,373 securities, and no single position exceeds 0.49% of the portfolio. It was launched in 2023. This fund also incorporates an ESG screen into its process. The Vanguard Short-Term Tax-Exempt Bond ETF has paid $2.76 per share over the trailing 12 months, which on its recent ~$100.95 share price works out to a 2.7% yield.

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Which looks like the better buy

Short-term and ultra-short-term bond funds are very popular these days amid an uncertain rate environment. Both the VanEck Short Muni ETF (SMB) and Vanguard Short-Term Tax-Exempt Bond ETF (VTES) offer short-duration, high-quality municipal bonds. Choosing between them depends on the factors that matter most to you.

SMB has squeezed out slightly higher recent total returns and dividend yields. In terms of credit quality, 67% of the fund's holdings are AA-rated and above. It's modestly more expensive than VTES and its smaller asset size under management results in lower daily trading volume compared to Vanguard. If you want to prioritize total returns over cost and AUM size, SMB may be the better choice.

VTES sports an ultra-low expense ratio and very high liquidity, given its AUM of over $2 billion. It's also far more diversified than SMB. Its credit quality is higher with nearly 84% of the fund's holdings rated AA and above. For investors prioritizing low cost, high quality and superior liquidity, VTES is the fund for you.

Robert Izquierdo 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.