Comparing IGSB vs VTES: Corporate Bonds Beat Tax-Exempt Bonds on Returns

Comparing iShares 1-5 Year Investment Grade Corporate Bond ETF (NASDAQ:IGSB) and Vanguard Short-Term Tax-Exempt Bond ETF (NYSEMKT:VTES) reveals a choice between higher-yielding taxable corporate debt and lower-yielding tax-exempt municipal securities for short-duration fixed-income portfolios.

Both funds aim to provide income and stability by targeting investment-grade bonds with relatively short maturities. However, they serve distinct tax strategies. The iShares ETF focuses on corporate issuers with maturities between one and five years, while the Vanguard fund prioritizes municipal bonds that are typically exempt from federal income taxes.

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 iShares fund is slightly more affordable with a 0.04% expense ratio, though the Vanguard fund's 0.05% fee is also remarkably low. For income seekers, the iShares fund offers a payout that is 1.86 percentage points higher, though these dividends are generally taxable at the federal level.

Performance & risk comparison

What's inside

iShares 1-5 Year Investment Grade Corporate Bond ETF manages a massive portfolio of 4,605 holdings. This fixed-income fund has no equity sector breakdown as it focuses on high-quality corporate debt securities denominated in U.S. dollars. The fund is highly diversified -- no single position exceeds 0.31% of the portfolio. It was launched in 2007. iShares 1-5 Year Investment Grade Corporate Bond ETF has paid $2.40 per share over the trailing 12 months, which, at its recent ~$52.13 share price, yields 4.60%.

Vanguard Short-Term Tax-Exempt Bond ETF holds 2,667 positions, primarily focusing on investment-grade municipal bonds. The fund utilizes a sampling strategy to track its index and employs an ESG screen. It was launched in 2023. Vanguard Short-Term Tax-Exempt Bond ETF has paid $2.76 per share over the trailing 12 months, which, at its recent ~$101.07 share price, yields 2.70%.

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Which looks like the better buy

The iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB) and Vanguard Short-Term Tax-Exempt Bond ETF (VTES) are both fixed-income exchange-traded funds (ETFs) that offer exposure to short-term bonds. However, they differ in some key respects that warrant further discussion. Here are the main takeaways.

First, let’s have a closer look at IGSB. 99% of this fund’s holdings are short-term corporate debt. As such, its top holdings include bonds issued by major U.S. corporations, including CVS, Boeing, and Citigroup. Since the fund’s holdings are almost entirely corporate debt, the fund boasts a strong dividend yield of 4.6%. As for performance, the fund has generated a total return of 11% over the last two years, equating to a compound annual growth rate (CAGR) of 5.2%. Lastly, IGSB’s expense ratio of 0.04% is also quite affordable, making this fund a compelling option for those seeking income at a reasonable cost.

Then, there’s VTES. This is a newer fund, founded in 2023 (IGSB was founded in 2007). It is focused on the municipal debt market, with over 98% of its holdings coming from local municipalities. As such, this fund is a very different animal from IGSB. One of the main benefits of investing in municipal bonds is that the income generated from them, for the most part, is not taxed at the federal level. Obviously, for many investors, this is a very compelling reason to own municipal bonds, or ETFs built around them. However, it is important to note that investors should always consult a tax professional. Turning to performance, VTES has generated a total return of 6% over the last two years, with a CAGR of 3.1%. The fund’s expense ratio is 0.05%, making cost-conscious investors happy.

In summary, these two funds differ greatly in their holdings and mission. IGSB is best for investors seeking stable income via the corporate debt market. VTES, on the other hand, offers a tax-advantaged option. Since every investor’s tax situation is unique, personal tax strategies and overall investment philosophy will likely determine which fund is the right fit for any given investor.

Citigroup is an advertising partner of Motley Fool Money. Jake Lerch has positions in Boeing. The Motley Fool has positions in and recommends Boeing. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.