Corporate Bonds vs. Treasuries: What Your Defensive Allocation Is Built On

Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) and Vanguard Short-Term Treasury ETF (NASDAQ:VGSH) differ mainly in credit exposure, yield, and risk, while sharing identical expense ratios and issuer backing.

Both the Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) and Vanguard Short-Term Treasury ETF (NASDAQ:VGSH) target investors seeking income with limited price swings, but they go about it with different bond types. This comparison looks at their costs, yields, performance, risk, and what’s inside to help investors decide which approach may fit their needs best.

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.

Both funds are equally affordable at 0.03% in annual expenses, but VCSH pays a slightly higher yield, which could appeal to those seeking a bit more income from their bond allocation.

Performance & risk comparison

What's inside

VCSH invests in high-quality, investment-grade corporate bonds with maturities between one and five years. The fund holds just 12 positions, with top allocations to Bank of America Corp (NYSE:BAC), Mktliq (NYSE:MKTLIQ), and CVS Health Corp (NYSE:CVS), each making up less than 0.3% of assets. The portfolio is managed by Vanguard and has a track record spanning 16.2 years, focusing exclusively on cash and other short-term instruments.

VGSH, by contrast, is dedicated solely to U.S. Treasury bonds, which means it takes on less credit risk but also typically offers a lower yield. Its holdings are spread across 93 different Treasuries, with top allocations to United States Treasury Note/Bond 1.50% 01/31/2027, United States Treasury Note/Bond 4.38% 07/15/2027, and United States Treasury Note/Bond 3.88% 07/31/2027. Both funds avoid leverage, currency hedging, or environmental, social, and governance (ESG) overlays.

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What this means for investors

Short-term bond ETFs are often treated as a parking place for cash, but the type of bond inside matters more than many investors expect. That is the real choice behind the Vanguard Short-Term Corporate Bond ETF and the Vanguard Short-Term Treasury ETF. Both aim to limit price swings, yet they protect capital in different ways as markets and credit conditions change.

Vanguard Short-Term Corporate Bond ETF is typically used by investors seeking modest income without taking on long-duration risk. It earns that extra yield by lending to high-quality companies, which ties returns to corporate credit conditions. Vanguard Short-Term Treasury ETF plays a more defensive role. By holding only U.S. government debt, it removes credit risk and focuses on preserving value and liquidity, even if that means accepting lower income.

The distinction shows up quickly when credit conditions enter the picture. Concerns about corporate balance sheets can weigh onVCSH even when interest rates are stable, while VGSH often holds its ground as investors seek safety. For investors, VCSH fits portfolios willing to trade some certainty for income, while VGSH suits investors who want short-term bonds to act as a true stabilizer in their portfolio.

Bank of America is an advertising partner of Motley Fool Money. Eric Trie has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.