VCIT vs VGIT: Which Bond ETF Wins in Today's Rate Environment?

The Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:VCIT) and Vanguard Intermediate-Term Treasury ETF (NASDAQ:VGIT) both offer low-cost exposure to investment-grade bonds, but VCIT provides higher yield and return potential in exchange for greater volatility and credit risk.

Both VCIT and VGIT aim to deliver moderate income, focusing on bonds with intermediate maturities. While VGIT sticks to U.S. Treasury debt, VCIT leans into corporate bonds, resulting in distinct risk and return profiles. This comparison looks at cost, performance, portfolio construction, and risk to help investors make informed decisions. weigh which may be a better fit for specific needs.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months.

Both funds are priced identically, with a rock-bottom 0.03% expense ratio, but VCIT stands out for its higher yield, offering an advantage for those seeking more income from their bond allocation.

Performance & risk comparison

What's inside

VCIT holds 2238 investment-grade corporate bonds spanning sectors like technology and financials, and has been in operation for more than 16 years. Its top positions include Meta Platforms Inc (NASDAQ:META) 4.875% 11/15/2035 and Bank of America (NYSE:BAC) 5.015% 07/22/2033, with no single holding dominating the portfolio. The fund’s focus on corporate credit means it will be more sensitive to changes in corporate bond spreads, but also offers higher yield potential as compensation.

VGIT, by contrast, holds 103 U.S. Treasury securities, all backed by the U.S. government and carrying minimal credit risk. Its top holdings are United States Treasury bonds with maturities in the 2030s. This focus results in a more conservative risk profile, with returns driven primarily by interest rate movements rather than credit conditions. Neither fund has notable quirks or unconventional exposures, making both straightforward options for core fixed-income allocations.

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What this means for investors

Bond ETFs are a great way to diversify portfolios that are heavily weighted toward stocks. They also provide a steady income over time and are easily tradable.

The Vanguard Intermediate-Term Corporate Bond ETF and the Vanguard Intermediate-Term Treasury ETF are two top bond ETFs from Vanguard. Both ETFs fall in the same duration bracket (intermediate term). While VCIT has an average duration of 6.1 years, VGIT has an average duration of 4.9 years.

However, VCIT is a higher-yield, higher-risk ETF because it invests in bonds issued by companies, which always carry default risk. That explains VCIT’s higher drawdown, as well as higher returns and yield. On the other hand, the U.S. government bonds that VGIT invests in are considered risk-free and tend to perform better during market turmoil and recessions because of their flight-to-safety appeal.

If you were to choose between the two ETFs today, VGIT should be your preferred choice if you want to hedge your portfolio and preserve capital while earning a stable income. If you believe the economy is stable and are comfortable with some volatility, VCIT offers better returns and yields. VCIT’s higher dividend yield can also be considered as a compensation for the additional risk it carries.

Bank of America is an advertising partner of Motley Fool Money. Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Meta Platforms. The Motley Fool has a disclosure policy.