Safety First? The Core Dilemma Between Fixed Income ETFs' Risk and Return

The Vanguard Long-Term Treasury ETF (NASDAQ:VGLT) provides low-cost exposure to government debt, while the iShares iBoxx $Investment Grade Corporate Bond ETF (NYSEMKT:LQD) yields more by holding highly rated corporate credit.

These two funds serve as core pillars for fixed-income investors seeking income and safety, yet they diverge significantly in credit risk and cost. This comparison examines whether the safety of government-backed securities or the slightly higher yield of investment-grade corporate bonds better serves a diversified portfolio in the current market environment.

Snapshot (cost & size)

Vanguard Long-Term Treasury ETF is the more affordable option, charging significantly less than the iShares fund. While both provide steady income, the iShares iBoxx $Investment Grade Corporate Bond ETF offers a slightly higher payout to compensate for its credit risk.

Performance & risk comparison

What's inside

Vanguard Long-Term Treasury ETF focuses on government bonds with maturities between 10 and 25 years. As a fixed-income fund, it provides no equity sector breakdown but manages 104 holdings. It was launched in 2009. Vanguard Long-Term Treasury ETF has paid $2.52 per share over the trailing 12 months, which, on its recent ~$52.15 share price, works out to a 4.8% yield.

The iShares iBoxx $Investment Grade Corporate Bond ETF tracks an index of high-quality corporate debt issued in U.S. dollars. Like its peer, it is a fixed-income fund with no equity sector breakdown, but it is much more diversified with 3,185 holdings. The fund is highly diversified -- no single position exceeds 0.19% of the portfolio. It was launched in 2002. iShares iBoxx $Investment Grade Corporate Bond ETF has paid $5.05 per share over the trailing 12 months, which, on its recent ~$103.85 share price, works out to a 4.9% yield.

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

Which looks like the better buy

When comparing the Vanguard Long-Term Treasury ETF (VGLT) and the iShares iBoxx $Investment Grade Corporate Bond ETF (LQD), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should examine each fund's strategy. VGLT focuses on U.S. Treasury debt securities, specifically those with 10 or more years to maturity. Given that it only holds U.S. Treasury debt, it carries virtually no credit risk. LQD, on the other hand, holds investment-grade corporate debt. This investment-grade debt is high quality, but because it is issued by corporations, it carries some risk of default.

Two other important factors are historical performance and income potential. Since 2021, LQD has delivered a total return of -4%, equating to a compound annual growth rate (CAGR) of -0.9%. VGLT, on the other hand, has delivered a total return of -30%, with a -6.8% CAGR. These total return figures include dividend payments. Currently, VGLT carries a dividend yield of 4.8%, and LQD's is 4.9%.

One final factor to weigh is cost. VGLT has an annual expense ratio of 0.03%, making it extremely affordable. LQD's expense ratio is 0.14%. For context, if a person were to invest $10,000 in each fund, they should expect to pay $3 in annual fees for their VGLT shares and $14 in annual fees for their LQD shares.

In summary, VGLT and LQD are both bond ETFs, but they tackle very different sectors within the fixed-income market. VGLT is best for investors with a very low risk tolerance who also value extremely low costs. LQD, on the other hand, is better suited to investors seeking a moderate yield and willing to accept moderate risk, with slightly higher annual fees.

Jake Lerch 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.