IGSB vs VCSH: Two Approaches to Short-Term Investment-Grade Credit

The Vanguard Short-Term Corporate Bond ETF (VCSH) and the iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB) differ most in portfolio breadth, sector tilts, and volatility, with VCSH offering a razor-thin edge on cost and yield.

Both VCSH and IGSB are popular short-term corporate bond funds focused on investment-grade U.S. debt maturing in one to five years. This comparison looks at their recent returns, risk, portfolio makeup, and costs to help investors decide which approach may better fit 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.

VCSH is marginally more affordable on expenses (0.03% versus 0.04%) and also delivers a slightly higher dividend yield, which may appeal to cost-conscious income seekers comparing these two funds.

Performance & risk comparison

What's inside

IGSB tracks U.S. investment-grade corporate bonds with maturities from one to five years, spanning an impressive 4,411 holdings as of its 19th year. The portfolio is heavily weighted toward cash and cash-like instruments, with top positions in Usd Cash, Blk Csh Fnd Treasury Sl Agency, and Eagle Funding Luxco S. R.l. 144a, together representing less than 2% of assets. This level of diversification can help further dampen volatility, as reflected in IGSB's notably low beta.

VCSH, while also focused on short-term, high-quality corporate bonds, holds far fewer positions and shows distinct sector tilts: about 31% in cash and others, 30% in financial services, and 7% in healthcare. Its largest allocations are toward Bank of America (NYSE:BAC) at 0.25%, CVS Health (NYSE:CVS) at 0.21%, and AbbVie (NYSE:ABBV) at 0.21% of the fund. Both ETFs avoid leverage, currency hedging, or other structural quirks.

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

What this means for investors

Investors often turn to short-term corporate bonds for stability, but stability depends less on maturity and more on how credit exposure is spread. IGSB and VCSH both sit in the same maturity window, yet they create stability in different ways, and that distinction becomes visible when credit spreads widen.

IGSB spreads its holdings across thousands of bonds, which keeps any single issuer from mattering much. With thousands of bonds spread thinly across issuers and sectors, credit risk is diluted to the point where individual decisions barely register. Changes in spreads tend to wash through gradually, which keeps daily price movement muted and makes the fund feel closer to a broad market snapshot than a portfolio making active credit statements. VCSH takes a more defined approach. Fewer holdings and clearer sector tilts, particularly toward financial issuers, allow credit conditions to show up more directly in returns, for better or worse.

For investors, the difference is not about maturity or quality but about how visible credit risk is meant to be. IGSB suits those who want investment-grade exposure that reflects the market as a whole, with issuer risk spread thin and largely unremarkable. VCSH fits investors who are comfortable with clearer credit fingerprints and modestly higher sensitivity when spreads move. The decision comes down to whether an investor wants credit risk to stay mostly invisible or to register clearly when markets reprice.

Glossary

ETF: Exchange-traded fund; a pooled investment fund traded on stock exchanges, holding assets like stocks or bonds.
Expense ratio: The annual fee, as a percentage of assets, charged by a fund to cover operating costs.
Dividend yield: Annual dividends paid by a fund or stock, expressed as a percentage of its current price.
Beta: A measure of an investment's volatility compared to the overall market, typically the S&P 500.
Drawdown: The peak-to-trough decline in value of an investment, usually shown as a percentage.
AUM: Assets under management; the total market value of assets a fund manages on behalf of investors.
Investment-grade: Bonds rated as relatively low risk of default by credit rating agencies, typically BBB/Baa or higher.
Portfolio breadth: The number and diversity of holdings within an investment fund.
Sector tilt: When a fund allocates more assets to certain sectors than the broader market or its benchmark.
Leverage: The use of borrowed money to increase the potential return (or risk) of an investment.
Currency hedging: Strategies used to reduce the risk of currency fluctuations impacting investment returns.
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.