IGSB Offers Higher Yield Potential but More Risk Thank SMB

Both the VanEck Short Muni ETF (NYSEMKT:SMB) and iShares 1-5 Year Investment Grade Corporate Bond ETF (NASDAQ:IGSB) are designed for investors seeking relatively low-duration bond exposure, but their approaches diverge. SMB tracks short-term tax-exempt municipal bonds, while IGSB tracks investment-grade U.S. corporate bonds.

Snapshot (cost & size)

The 1-yr return represents total return over the trailing 12 months.

IGSB’s lower expense ratio is minimal, but its dividend yield is substantially higher than SMB’s, having nearly double the amount.

Performance & risk comparison

What's inside

IGSB holds 4,532 bonds, focusing on investment-grade corporate debt with maturities of 1 to 5 years. The fund is nearly two decades old, and its largest positions are in bonds issued by top companies such as Goldman Sachs (NYSE:GS) and Bank of America (NYSE:BAC) . It primarily holds A- and BBB-rated bonds, with each class carrying at least 40% weight.

About two years younger than IGSB, SMB has fewer assets and a more concentrated portfolio, holding 334 municipal bonds. A majority of the ETF’s bonds are in the AA class, while 22% of its holdings are A-rated, and another 17% are rated AAA.

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What this means for investors

When choosing between these two ETFs, it will come down to volatility preference, as both ETFs have similar one-year returns and have fallen around 4% within the last five years. Corporate bonds are typically more vulnerable to default and volatility than municipal bonds. But because of that increased risk, corporate bonds often offer higher yields and greater price return potential.

Municipal bonds are less risky than corporate bonds but typically offer slower returns. And because SMB has more weight allocation towards higher-rated bonds, that risk can be even safer, because bonds in higher classes have a smaller chance of default. IGSB holds zero AAA-rated bonds.

Regardless of which ETF investors may want to go with, it should be noted that bond-related ETFs are often some of the slowest-growing in terms of price, compared to traditional stock-holding funds. But the high dividend yields can make investing in these types of funds worth it.

Bank of America is an advertising partner of Motley Fool Money. Adé Hennis has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.