Better ETF: Vanguard BSV vs. iShares ISTB

Vanguard Short-Term Bond ETF (NYSEMKT:BSV) and iShares Core 1-5 Year USD Bond ETF (NASDAQ:ISTB) both target the 1–5 year U.S. bond market, but BSV stands out for its lower costs and more concentrated portfolio, while ISTB casts a wider net across thousands of holdings.

Both funds aim to provide exposure to short-term U.S. bonds, with BSV focusing on investment-grade bonds and ISTB including both investment-grade and high yield for investors seeking stability and income. This comparison looks at how BSV and ISTB stack up on cost, performance, risk, portfolio makeup, and tradability, helping investors weigh which may better match their needs.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

BSV charges half the fees of ISTB, making it more affordable for cost-conscious investors, though ISTB offers a marginally higher dividend yield. The difference in expenses could matter more to those holding large positions or investing for the long term.

Performance & risk comparison

What's inside

Vanguard Short-Term Bond ETF holds just 30 bonds, focusing heavily on communication services (69%), with the remainder in financial services and cash. Its largest positions include Citigroup (NYSE:C), JPMorgan Chase (NYSE:JPM), and Bank of America (NYSE:BAC), each representing a small fraction of assets. The fund has an 18.7-year track record and massive assets under management (AUM), supporting liquidity.

ISTB, by contrast, spreads its assets across nearly 7,000 bonds, resulting in a portfolio dominated by utilities (99%) and a tiny real estate allocation. Top holdings are U.S. Treasury notes, each making up about 1% of assets. Both funds avoid leverage, currency hedging, and other structural quirks.

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

What this means for investors

The Vanguard Short-Term Bond ETF (BSV) and iShares Core 1-5 Year USD Bond ETF (ISTB) both offer compelling strengths, while the downsides for each are small, making either a good choice for investors.

BSV is more advantageous than ISTB for investors who want lower costs and high liquidity. After all, BSV has a smaller expense ratio and far greater assets under management. Thanks to that greater liquidity, BSV is going to appeal to those who want to make transactions at prices that closely reflect the intrinsic value of the underlying assets.

ISTB provides a broader diversification of bonds and a better dividend yield. Because the bulk of those bonds are in utilities, which are vital services that consumers pay for regardless of broader economic conditions, they are resistant to recessions and macroeconomic uncertainty. Therefore, ISTB can be a compelling choice for investors who want that kind of stability, and a dependable dividend.

Glossary

ETF: Exchange-traded fund; a fund that trades on an exchange like a stock, holding a basket of assets.
Expense ratio: The annual fee, as a percentage of assets, that a fund charges to cover operating costs.
Investment-grade: Bonds rated as relatively low risk of default by credit rating agencies.
High yield: Bonds with lower credit ratings, offering higher interest rates due to greater risk.
Dividend yield: Annual income from dividends as a percentage of the investment's price.
Beta: A measure of an investment's volatility compared to the overall market, typically the S&P 500.
AUM: Assets under management; the total market value of assets a fund manages.
Max drawdown: The largest percentage drop from a fund's peak value to its lowest point over a period.
Liquidity: How easily an asset can be bought or sold in the market without affecting its price.
Sector exposure: The proportion of a fund's assets invested in specific industries or sectors.
Leverage: Using borrowed money to increase the potential return (and risk) of an investment.
Currency hedging: Strategies used to reduce the impact of currency exchange rate fluctuations on investments.

Citigroup is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Robert Izquierdo has positions in Bank of America and JPMorgan Chase. The Motley Fool has positions in and recommends JPMorgan Chase and Vanguard Bond Index Funds - Vanguard Short-Term Bond ETF. The Motley Fool has a disclosure policy.