The Bond Market Is Heating Up. Is VGSH or ISTB the Better Bang for Your Buck?

Vanguard Short-Term Treasury ETF (NASDAQ:VGSH) and iShares Core 1-5 Year USD Bond ETF (NASDAQ:ISTB) differ primarily in their credit exposure and yield potential, as one sticks to government debt while the other ventures into corporate bonds.

These funds serve as conservative anchors for a portfolio, but they differ in credit risk and duration. While the Vanguard fund tracks the Bloomberg US Treasury 1-3 Year Index for pure government exposure, the iShares fund follows the Bloomberg U.S. Universal 1-5 Year Index to capture a broader slice of the bond market.

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.

The Vanguard fund is the more affordable option with its 0.03% expense ratio, half that of its iShares counterpart. However, the iShares fund may appeal to income-focused investors due to its higher 4.3% dividend yield, which represents a 0.5 percentage point advantage over the Vanguard fund.

Performance & risk comparison

What's inside

iShares Core 1-5 Year USD Bond ETF holds 7,451 positions, offering a diversified mix of U.S. Treasury, government-related, corporate, and mortgage-backed securities with maturities between one and five years. The broader scope of the iShares fund introduces more sensitivity to corporate credit cycles than a pure Treasury fund. The fund was launched in 2012. iShares Core 1-5 Year USD Bond ETF has paid $2.06 per share over the trailing 12 months, which on its recent ~$47.55 share price works out to a 4.3% yield.

Vanguard Short-Term Treasury ETF holds 92 issues, strictly limiting its portfolio to U.S. Treasury securities with maturities between one and three years. The Vanguard fund limits itself to the highest-quality government paper, which typically results in lower volatility during periods of credit stress. The fund was launched in 2009. Vanguard Short-Term Treasury ETF has paid $2.19 per share over the trailing 12 months, which on its recent ~$57.73 share price works out to a 3.8% yield.

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

Which looks like the better buy

Investors looking to add diversity and stability to their stock portfolios may be considering stepping into the bond market. Investing in bonds can reduce overall volatility while providing consistent cash flow. But there are different ways to approach the theme. Treasury bonds are debt securities issued on behalf of the U.S. government. They're considered some of the lowest-risk debt you can buy, which means low volatility, but also a lower yield. Still, with Treasury yields rising and market watchers now expecting a rate hike this month, they may be a compelling source of consistent income and portfolio stability.

The iShares Bond ETF offers a broader approach, holding a mix of U.S. Treasury notes, mortgage-backed securities, and corporate bonds. This mix introduces more risk, but also lends itself to a higher dividend payout than the Treasury-only option.

I'm intrigued by the iShares Bond ETF in this comparison. It still holds 50% of its portfolio in short-term U.S. Treasuries, lending stability to the fund, while generating more income. But interested investors should remember these funds won't be impressive in the growth department. Indeed, even their relatively low one-year growth numbers are on a total return basis, meaning the interest was reinvested. Without reinvestment, both funds are actually down over the last year.

Sarah Sidlow 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.