LQD vs VCLT: Two Ways to Hold Corporate Credit

Vanguard Long-Term Corporate Bond ETF (VCLT) looks more affordable and offers a higher payout than iShares iBoxx Investment Grade Corporate Bond ETF (LQD), but comes with greater risk and a narrower portfolio.

Both LQD and VCLT target investment-grade U.S. corporate bonds, but they differ in maturity profiles, sector tilts, and risk. LQD is the go-to for broad exposure and liquidity, while VCLT may appeal to those seeking higher income and can tolerate bigger price swings in long-term bonds.

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.

VCLT is more affordable with a notably lower expense ratio, and it currently pays a higher dividend yield compared to LQD.

Performance & risk comparison

What's inside

VCLT holds 2400 bonds, with a focus on long-term investment-grade corporate debt—primarily maturing in 10 to 25 years. Its biggest sector exposures are healthcare (14%) and financial services (13%). Top holdings include CVS Health (NYSE:CVS), The Goldman Sachs Group (NYSE:GS), and Meta Platforms (NASDAQ:META). The fund has over 16 years of track record.

LQD offers much broader diversification, holding over 3,000 bonds. Its sector allocation is 100% Cash & Others, with notable positions including Blk Csh Fnd Treasury Sl Agency, Anheuser-busch Companies Llc, and Usd Cash. LQD tracks a mainstream investment-grade index.

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What this means for investors

At first glance, the iShares iBoxx Investment Grade Corporate Bond ETF and the Vanguard Long-Term Corporate Bond ETF appear to serve the same role where both ETFs provide exposure to investment-grade U.S. corporate debt. The meaningful difference is not credit quality, but interest rate risk. LQD is structured as a broad and liquid core holding, while VCLT concentrates exposure much further out on the yield curve, which materially changes how each fund responds when interest rates fluctuate.

LQD holds thousands of bonds across a wide range of maturities, resulting in a shorter duration and more restrained price fluctuations. That design has made it a common benchmark for investment-grade corporate exposure and a frequent choice for investors prioritizing stability and liquidity. On the other hand, VCLT focuses on corporate bonds with longer maturities. This gives the ETF a significantly higher duration and greater sensitivity to long-term rate changes. Its higher yield reflects compensation for that added rate exposure rather than a meaningful shift in underlying credit risk.

For investors, the real question is whether they want stability or are willing to accept bigger swings for higher income. LQD is typically used as a core corporate bond allocation intended to provide steady income and moderate volatility. VCLT, by contrast, carries much heavier duration exposure and can magnify gains or losses as long-term yields move. The choice ultimately comes down to comfort: LQD is designed to steady a portfolio, while VCLT asks investors to accept sharper swings in exchange for higher income when rates move in their favor.

Glossary

Expense ratio: The annual fee, as a percentage of assets, that a fund charges to cover its operating costs.
Dividend yield: Annual income from dividends as a percentage of the fund's current price.
Drawdown: The percentage decline from a fund’s peak value to its lowest point over a period.
Beta: A measure of a fund’s volatility compared to the overall market, typically the S&P 500.
AUM (Assets Under Management): The total market value of assets that a fund manages on behalf of investors.
ESG screen: A process that includes or excludes investments based on environmental, social, and governance criteria.
Investment-grade: Bonds rated as relatively low risk of default by credit rating agencies.
Sector exposure: The proportion of a fund’s assets invested in specific industries or sectors.
Liquidity: How easily an asset or fund can be bought or sold without affecting its price.
Maturity profile: The range of times until the bonds in a fund reach their repayment dates.
Diversification: Spreading investments across various assets to reduce risk.
Total return: The investment's price change plus all dividends and distributions, assuming those payouts are reinvested.

Eric Trie 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.