Which Vanguard Bond ETF Should You Choose, BND or VGIT?

Ever since the Fed concluded its aggressive rate-hiking cycle in 2023, fixed income is no longer an asset class to be ignored. Even ultra-short, risk-free three-month Treasury bills are offering yields north of 3.5% right now. That makes it a viable asset class to consider as part of a broader portfolio.

The better question might be how to approach investing in fixed income.

In my opinion, the two best ways to invest are:

• Short-term Treasuries: This would be the more defensive, risk-off play that still pays a decent yield. It might be more appropriate if you're expecting a deeper bear market.
• Total bond market: This would be more of a traditional asset allocation play. This could be used as part of a larger portfolio for long-term investing.

Within the Vanguard lineup, that means we're looking at the Vanguard Short-Term Treasury ETF (NASDAQ: VGSH) and the Vanguard Total Bond Market ETF (NASDAQ: BND).

You could make a case for either, but I would personally choose one over the other.

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Short-term Treasuries vs. Total Bond Market

The Vanguard Short-Term Treasury ETF invests primarily in high-quality U.S. Treasury bonds with a dollar-weighted average maturity of one to three years. It currently yields 3.6%.

The Vanguard Total Bond Market ETF provides broad exposure to the investment-grade bond market, including Treasuries, corporate bonds, and mortgage-backed securities (MBS). It currently yields 4.2%.

Both offer fairly plain vanilla coverage of their target markets and come with low expense ratios of 0.03% -- a hallmark of Vanguard funds. Each would be a top-tier choice within their respective spaces.

VGSH: If you're expecting a risk-off event

This ETF could easily serve solely as an ultra-low-risk income vehicle. It has the double benefit of acting as a counterbalance to a sharp correction in equity prices.

In many cases, Treasuries have an inverse correlation with stocks, meaning their prices tend to rise when stock prices fall. Because of that, they're often considered a risk hedge and downside protection tool for a portfolio.

One scenario in which they may not work, however, is in an inflationary environment. This is what we saw during 2022. Soaring inflation, coupled with rising interest rates, led to stock and bond prices falling simultaneously. Just when investors needed Treasury protection, it didn't happen.

BND: Core bond exposure for diversification

Since this ETF offers broad bond exposure across numerous categories, it probably serves better as a core portfolio allocation than as a pure risk-off tool.

The Treasury segment of this fund, which currently accounts for around 70% of the portfolio, will come with similar characteristics to the Short-Term Treasury ETF. But the 30% invested in corporate bonds might behave differently.

Because they're bonds, they can provide some risk protection. But because they come with corporate credit risk and more interest rate risk, they frequently fall in value during stock market corrections. The diversification in this fund helps counteract some of this, but you could very well see it perform differently at times compared to a pure Treasury ETF.

Which Vanguard bond ETF should you choose?

Personally, I would choose the Vanguard Total Bond Market ETF.

Treasury ETFs probably serve better as a pure risk-off hedge. If you believe that's needed, then it could be the better choice. I'm not convinced we're headed in that direction. The high-level economic figures suggest we're at least in a resilient economy if not one that continues to expand. In that case, the addition of corporate bonds in the Total Bond Market ETF probably enhances upside potential. And you get a yield boost on the side.

Given current overall conditions and where conditions appear to be headed, I think the Vanguard Total Bond Market ETF is the better choice.

David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.