Which Short-Term Bond ETF Is the Better Buy: Vanguard’s Treasury Fund VGSH or Bond Fund BSV?

Vanguard Short-Term Bond ETF (NYSEMKT:BSV) offers broader credit exposure and a higher yield, while Vanguard Short-Term Treasury ETF (NASDAQ:VGSH) provides a more conservative, pure-play Treasury portfolio for identical costs.

Both Vanguard Short-Term Treasury ETF and Vanguard Short-Term Bond ETF target the short end of the yield curve, providing investors with a way to manage cash while seeking stability. While they share the same ultra-low expense ratio, the primary difference lies in credit quality and diversification. VGSH sticks strictly to government debt, whereas BSV adds corporate and international bonds.

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-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

These funds are exceptionally affordable with identical 0.03% expense ratios. However, BSV provides a higher payout with its 4.5% yield, compared to the 4.1% offered by VGSH. This yield gap reflects the additional risk inherent in BSV's corporate bond holdings.

Performance & risk comparison

What's inside

Vanguard Short-Term Bond ETF aims to mirror a float-adjusted index that includes investment-grade debt securities with maturities between one and five years. It is a fixed income fund with no equity sector breakdown, and its 3,155 holdings include the United States Treasury Note/Bond 4.38% 08/31/2031 at 1.70% and the United States Treasury Note/Bond 5.00% 09/30/2031 at 1.32%. This broader mandate allows it to capture credit spreads beyond Treasury yields. The fund was launched in 2007.

Vanguard Short-Term Treasury ETF employs a more concentrated strategy by tracking the Bloomberg US Treasury 1--3 Year Index. Like its peer, it is a fixed income fund with no equity sector breakdown. Its portfolio of 95 holdings includes the United States Treasury Note/Bond 3.50% 01/31/2028 at 2.07% and the United States Treasury Note/Bond 4.63% 04/30/2029 at 1.43%. Because it holds only government-backed debt, it generally offers lower price volatility than the bond fund. The fund was launched in 2009.

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Which looks like the better buy

I'd go with VGSH, because the small bonus for owning corporate bonds instead of government bonds is not worth the extra risk right now. The Federal Reserve raised interest rates again in September, and companies are paying only a small bonus over the government to borrow, so reaching for credit risk is not rewarding you much right now.

VGSH owns only U.S. Treasuries, so there is no default risk, and its worst drop over five years was smaller than BSV's. Treasuries are also backed by the U.S. government, so they tend to hold up when markets get shaky. BSV yields a little more, but the difference is small, and over five years the two funds have grown almost the same amount.

BSV holds corporate and international bonds alongside Treasuries, which makes it a solid choice if you want a bit more income and can accept some credit risk. But for most long-term investors who want short-term bonds to be the calm part of a portfolio, VGSH is the better buy, and it costs exactly the same.

Sara Appino 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.