VCSH vs SCHO: Corporate Bonds Face Off Against Treasuries

Vanguard Short-Term Corporate Bond ETF (NASDAQ:VCSH) and Schwab Short-Term U.S. Treasury ETF (NYSEMKT:SCHO) provide low-cost exposure to short-duration debt, differing primarily in their credit quality and yield potential.

Investors seeking to stabilize a portfolio often look toward the short end of the yield curve for lower interest rate sensitivity. These two funds offer liquid, ultra-low-cost entries into the fixed-income market. While they share similar duration targets, their underlying holdings lead to distinct risk-reward profiles in varying economic climates.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Both funds are exceptionally affordable, each sporting a 0.03% expense ratio. The Vanguard fund currently provides a higher payout, though this yield gap of 0.59 percentage points compensates investors for the added risk of lending to corporations instead of the government.

Performance & risk comparison

What's inside

Schwab Short-Term U.S. Treasury ETF invests in publicly issued U.S. Treasury securities with remaining maturities between one and three years. This is a fixed-income fund with no equity sector breakdown. Its portfolio contains 97 holdings, and the fund was launched in 2010. Schwab Short-Term U.S. Treasury ETF has paid $0.93 per share over the trailing 12 months, which on its recent ~$24.11 share price works out to a 3.9% yield.

Vanguard Short-Term Corporate Bond ETF targets investment-grade corporate debt with dollar-weighted average maturities between one and five years. It is also a fixed-income fund with no equity sector breakdown. Its largest positions include high-quality corporate notes, and the fund is highly diversified with more than 3,000 holdings; no single position exceeds 0.5% of the portfolio. It was launched in 2009. Vanguard Short-Term Corporate Bond ETF has paid $3.51 per share over the trailing 12 months, which on its recent ~$78.72 share price works out to a 4.5% yield.

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Which looks like the better buy

Investors looking to add some economic safety and guaranteed income to their portfolios often look to the bond market. Investing in bonds basically involves investing in debt, either from corporations, as in corporate bonds held by VCSH, or the government, as in the Treasuries held by SCHO. Investing in debt isn't without risk, as the borrower could theoretically default on their loan. But the debt held in both of these funds is pretty safe -- Treasuries are backed by the U.S. government, and VCSH holds only investment-grade corporate debt by big corporations like Morgan Stanley, Bank of America, and JPMorgan Chase, plus some U.S. Treasuries.

Both of these funds come in at the very low end of the expense range, at 0.03%. The Vanguard fund's higher dividend payout may appeal to investors seeking maximum income opportunities. That higher dividend compensates for the elevated risk you take on by investing in corporate debt over government debt.

On the other hand, if you're looking for maximum capital protection, short-term Treasuries may be a better bet. They're less interest rate sensitive than their long-term peers, and they're backed by the U.S. government, so the risk of default is as low as it gets.

JPMorgan Chase is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Sarah Sidlow has positions in Bank of America. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.