Bond ETFs: VGIT Boasts Lower Costs While FBND Provides Higher Yield

Key Points

• VGIT offers a much lower expense ratio, while FBND delivers a higher dividend yield

• FBND holds a broader, more diversified bond portfolio but has experienced a slightly deeper five-year drawdown

• VGIT is larger by assets under management and invests primarily in U.S. Treasury bonds.

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Both Vanguard Intermediate-Term Treasury ETF (NASDAQ:VGIT) and Fidelity Total Bond ETF (NYSEMKT:FBND) target investors seeking core bond exposure, but they take notably different paths: VGIT invests exclusively in intermediate-term U.S. Treasuries, whereas FBND blends government, corporate, and other bonds for a broader reach. This comparison weighs their cost, risk, performance, and portfolio construction to help investors decide which may align better with their income and diversification goals.

Snapshot (Cost & Size)

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

VGIT is considerably more affordable with a 0.03% expense ratio, compared to FBND’s 0.36%. FBND may appeal to income-focused investors, as it currently offers a higher dividend yield by 0.9 percentage points.

Performance & Risk Comparison

What’s Inside

FBND holds 2,742 bonds spanning a mix of sectors. Its top holdings are corporate bonds from major financial institutions such as Bank of America, JPMorgan Chase, and Goldman Sachs, though each represents less than 1% of the portfolio. Having been on the market for more than 11 years, FBND aims to provide income and diversification, with no leverage, currency hedging, or other structural quirks.

VGIT, by contrast, focuses exclusively on U.S. Treasury securities, reflected in its 100% allocation to cash and others. Its top holdings are recent Treasury notes and bonds. This makes VGIT a straightforward, lower-risk option for those prioritizing government credit quality and simplicity.

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What This Means For Investors

For investors seeking fixed-income exposure, both Vanguard Intermediate-Term Treasury ETF (VGIT) and Fidelity Total Bond ETF (FBND) are two funds worth considering. Here’s what investors should know.

First off, let’s address one of the most significant differences: each fund’s expense ratio. VGIT has an expense ratio of 0.03%, while FBND has an expense ratio of 0.36%. VGIT’s 0.03% expense ratio is about as close to zero as one can reasonably hope to get. It means an investor only pays $3 per year for each $10,000 investment in the fund. By contrast, FBND’s 0.36% expense ratio is much closer to an average fee that one might expect to pay. So, on this count at least, VGIT has a significant leg up.

Another important difference is each fund’s respective holdings. VGIT invests only in intermediate-term U.S. government securities. FBND, meanwhile, invests in fixed-income products from a range of sources, including corporate entities in addition to corporate issues. One could argue that VGIT is therefore less risky, as its holdings are backed by the U.S. government instead of a mix of governments and corporations.

Finally, there’s yield. On this front, FBND offers a higher yield of 4.7%, versus 3.8% for VGIT. This is expected, given that FBND’s portfolio holds more risky products, issued by corporations rather than the Federal government.

In summary, VGIT is the safe choice, with its low expense ratio and higher quality portfolio. However, investors that are seeking higher levels of income might consider FBND given its 4.7% yield.

Glossary

ETF: Exchange-traded fund that holds a basket of assets and trades like a stock.
Expense ratio: Annual fund operating costs expressed as a percentage of the fund’s average assets.
Dividend yield: Annual cash distributions from a fund divided by its current market price.
Beta: Measure of an investment’s volatility compared with a benchmark index, often the S&P 500.
AUM: Assets under management; the total market value of all assets held by the fund.
Max drawdown: Largest peak-to-trough decline in value over a specific period, showing worst historical loss.
Intermediate-term bonds: Bonds maturing in roughly three to ten years, balancing interest-rate risk and income.
Corporate bonds: Debt securities issued by companies to raise capital, typically paying periodic interest.
U.S. Treasuries: Debt securities issued by the U.S. government, generally considered very low credit risk.
Sector diversification: Spreading investments across different industries to reduce exposure to any single sector’s risks.
Core bond exposure: A portfolio’s main bond allocation intended to provide stability, income, and diversification.
Total return: Investment performance including price changes plus all interest and dividends, assuming reinvestment.

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Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Jake Lerch has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.