VGSH vs. SMB: A Comparison of Two Top Short-Term Bond ETFs

The Vanguard Short-Term Treasury ETF (NASDAQ:VGSH) offers lower costs and higher historical yields, while the VanEck Short Muni ETF (NYSEMKT:SMB) provides tax-exempt income through short-duration municipal bonds for income-focused investors.

Both funds target the short end of the fixed-income curve to minimize interest rate risk. While VGSH tracks U.S. Treasuries, the VanEck fund focuses on the municipal market, offering potential tax advantages that may appeal to investors who are in higher tax brackets.

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.

The Vanguard fund is the more affordable option with a 0.03% expense ratio compared to 0.07% for the VanEck fund. Additionally, VGSH has recently provided a higher payout with a yield gap of 1.09 percentage points.

Performance & risk comparison

What's inside

Vanguard Short-Term Treasury ETF is a fixed-income fund with no equity sector breakdown, primarily holding U.S. Treasury bonds with maturities between one and three years. Its largest positions include United States Treasury Note/Bond 3.50% 01/31/2028 at 2.25%, United States Treasury Note/Bond 4.63% 04/30/2029 at 1.41%, and United States Treasury Note/Bond 4.50% 05/31/2029 at 1.38%. The fund holds 91 securities and was launched in 2009. Vanguard Short-Term Treasury ETF has paid $2.23 per share over the trailing 12 months, which, on its recent ~$58.04 share price, works out to a 3.9% yield.

VanEck Short Muni ETF allocates 100% of its portfolio to municipal bonds and cash equivalents to track short-duration, tax-exempt debt. Its largest positions include the New York City Transitional Finance Authority at 1.09%, the Charlotte-Mecklenburg Hospital Authority at 1.07%, and the Indiana Finance Authority at 1.07%. The fund holds 327 securities and was launched in 2008. It also incorporates an ESG screen into its selection process. VanEck Short Muni ETF has paid $0.48 per share over the trailing 12 months, which, at its recent ~$17.27 share price, works out to a 2.8% yield.

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What does this mean for investors?

These bond ETFs are attractive for their high yields, short-term durations, and monthly distributions. The short durations limit volatility if interest rates rise or fall in the near term.

Vanguard’s higher asset size and yield may appeal to investors. But that will largely depend on each investor’s tax bracket, since VGSH is not exempt from income taxes like the VanEck ETF.

SMB offers a lower yield, but its federally tax-exempt income offsets that. This may be well-suited for an investor in a high tax bracket or for someone looking to hold this ETF in a taxable brokerage account.

The Vanguard (VGSH) has a lower effective maturity of about two years, compared to over three years for the VanEck. This means the VanEck will experience greater volatility if interest rates shift. This could allow SMB to outperform VGSH if interest rates fall, but it could also backfire in the opposite scenario of higher rates.

John Ballard 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.