Vanguard vs iShares: Which Short Term Bond ETF Offers Investors Better Value?

Short-term bond funds offer a refuge for investors looking to protect capital while capturing current interest rates. While both funds target the shorter end of the maturity spectrum to limit price swings, they differ significantly in credit exposure, ranging from pure government debt to a mix of corporate bonds.

Comparing Vanguard Short-Term Treasury ETF (NASDAQ:VGSH) and iShares Core 1-5 Year USD Bond ETF (NASDAQ:ISTB) involves weighing the safety of pure Treasuries against the higher yields of a diversified bond mix.

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. Dividend yield is the trailing-12-month distribution yield based on the closing price of June 29.

The Vanguard fund is the more affordable option with a 0.03% expense ratio. However, the iShares fund offers a higher payout, providing a 0.30 percentage point yield advantage over its Treasury-only counterpart.

Performance & risk comparison

The iShares Core 1-5 Year USD Bond ETF is a diversified fixed income fund that tracks the Bloomberg U.S. Universal 1-5 Year Index. It holds 7,003 securities, including a broad blend of U.S. Treasuries, investment-grade corporate bonds, and emerging market debt with remaining maturities between one and five years. It was launched in 2012. The fund has paid $2.05 per share over the trailing 12 months, which, on its recent ~$48.30 share price, works out to a 4.20% yield.

The Vanguard Short-Term Treasury ETF maintains a narrower focus, holding 93 issues specifically from the Bloomberg U.S. Treasury 1-3 Year Index. The portfolio comprises entirely of fixed-income securities issued by the U.S. Treasury, excluding inflation-protected or floating-rate notes. It was launched in 2009. The fund has paid $2.25 per share over the trailing 12 months, which, on its recent ~$58.25 share price, works out to a 3.90% yield.

Which ETF is the better buy?

Both funds are designed to offer a haven for investors looking to park their cash and earn a return better than a savings account.

The iShares Core 1-5 Year USD Bond ETF — ISTB — is a low cost (0.06% expense ratio) fund that offers a mix of federal, industrial, and corporate bonds. Including government-backed agency debt, roughly 60% of ISTB is in U.S. government paper, which offers a high level of security (52% of the portfolio is in Treasuries, which are the most secure bonds in the market). The inclusion of industrial bonds (17.6% of the portfolio), other sovereign bonds (2.8%), and utilities (1.9%), among others, adds more risk to the funds. But that risk is paid for with better returns over time. ISTB has returned annualized rates of 4.8%, 1.91%, and 2.33% over the 3-, 5-, and 10-year time frames, respectively.

The Vanguard Short-Term Treasury ETF — VGSH — is all in Treasuries, making it a less-risky place to park your cash. That means returns are not as good as the iShares offering. VGSH has returned 4.14%, 1.83%, and 1.77% annually over the 3-year, -year and 10-year look-backs. That lags ISTB in each time frame.

The lower cost (0.03% expense ratio) and the higher security of the Vanguard ETF, which holds only Treasury bonds, are worth considering, however. As iare returns that aren’t too far off what ISTB has shown. Given its maximum drawdown is 5.6% compared to 9.3% for ISTB, the Vanguard Short-Term Treasury ETF gets the nod, considering most investors are looking to balance security with a modest investment return.

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

Brendan Coffey 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.