Intermediate-term bonds offer a safer alternative to long-term bonds with TLT and VGIT ETFs.

The article discusses the comparison between the iShares 20+ Year Treasury Bond ETF (TLT) and the Vanguard Intermediate-Term Bond ETF (VGIT). The author argues that investors should consider VGIT over TLT due to its higher yields and lower credit risk. The author also mentions that the yield spread between the two ETFs is near a 10-year low, making VGIT a more attractive option for investors seeking higher returns with lower credit risk.

Investors seeking exposure to U.S. Treasury bonds have a variety of options to consider, with two of the most popular being the iShares 20+ Year Treasury Bond ETF (TLT) and the Vanguard Intermediate-Term Bond ETF (VGIT). Both funds offer exposure to the Treasury market but differ in their focus on long-term versus intermediate-term bonds. This article provides a comparative analysis of these two ETFs, highlighting key differences and considerations for investors.

Fund Basics and Focus

TLT focuses on long-term Treasury bonds with 20 years or more of remaining maturity, making it highly sensitive to long-term interest rate movements. In contrast, VGIT tracks intermediate-term Treasury bonds with maturities between 3 and 10 years. This difference in focus translates into varying durations and sensitivities to interest rate changes.

Interest Rate Sensitivity

TLT, with a weighted average maturity of 25.87 years and an effective duration of 15.62 years, is more sensitive to interest rate changes compared to VGIT. The latter has an average duration of 4.9 years and an average effective maturity of 5.6 years. This means that TLT's bond prices are more likely to fluctuate significantly in response to changes in interest rates, while VGIT's prices will be less affected.

Yield Spread and Return/Risk Ratio

The yield spread between long-term and intermediate-term Treasury bonds has been a key factor in the author's preference for VGIT. Over the past 20 years, the spread between the 30-year and 5-year U.S. Treasury rates has fluctuated between 0% and 3%, with the current spread at approximately 0.93%. This near-10-year low in the yield spread suggests that VGIT's yield may not sufficiently compensate for the risks associated with TLT, given its higher sensitivity to interest rate changes.

Fund-Specific Considerations

In terms of fund-specific considerations, VGIT has a lower expense ratio of 0.03% compared to TLT's 0.15%, making it a more cost-effective option for investors. Additionally, VGIT has a higher annual dividend yield of 3.65% compared to TLT's 3.128%. However, it is essential to note that VGIT has a higher turnover rate of 52% compared to TLT's 19%, which can result in more trading frictions and tax consequences.

Conclusion

Given the current yield spread between long-term and intermediate-term Treasury bonds, the author favors VGIT over TLT. The higher yields and lower credit risk of VGIT make it a more attractive option for investors seeking exposure to the Treasury market with lower sensitivity to interest rate changes. However, investors should consider the fund's expense ratio, turnover rate, and their own risk tolerance when making investment decisions.

References

[1] https://seekingalpha.com/article/4808475-tlt-vs-vgit-3-reasons-go-with-intermediate-terms-bonds
[2] https://tickeron.com/compare/TLT-vs-VGLT/