Choosing Between VGIT and FBND: Cost-Efficient Treasuries vs. High Yield Bonds ETF

When building a fixed-income portfolio, investors frequently encounter a fundamental question: should they prioritize low costs and government-backed stability, or seek higher yields through diversified bond exposure? Two standout options—Vanguard Intermediate-Term Treasury ETF (VGIT) and Fidelity Total Bond ETF (FBND)—represent opposite ends of this spectrum, offering distinct approaches to earning income through bond ETF investments. Understanding their differences becomes crucial for aligning your portfolio with your financial goals.

The Cost Advantage: Why Expense Ratios Matter in Bond ETF Selection

When comparing investment funds, few factors impact long-term returns as dramatically as annual fees. VGIT and FBND exemplify this principle with starkly different cost structures.

VGIT charges just 0.03% in annual expenses—roughly $3 per $10,000 invested—making it one of the most affordable bond ETF options available. This ultra-low expense ratio means nearly every dollar of your investment works for you, rather than going toward fund management. FBND, by contrast, carries a 0.36% expense ratio, which translates to $36 per $10,000 invested annually.

While 0.33 percentage points might seem modest, compounded over decades, this cost differential substantially reduces your total return. For investors prioritizing capital preservation and efficiency, VGIT’s expense structure offers a significant advantage that compounds over time. Asset under management (AUM) also reflects this appeal: VGIT manages $39.0 billion compared to FBND’s $23.8 billion, suggesting that cost-conscious investors have gravitated toward Vanguard’s offering.

Income Generation: High Yield Bonds Strategy in FBND vs. Conservative Treasury Approach

The yield comparison reveals the fundamental trade-off between these two bond ETF strategies. FBND currently delivers a 4.7% dividend yield, while VGIT offers 3.8%—a 0.9 percentage point difference that may seem attractive to income-focused investors seeking higher returns.

This yield premium exists because FBND pursues a high yield bonds approach by blending multiple fixed-income sources: government securities, corporate debt, and other credit instruments. By venturing beyond Treasury bonds into corporate territory, FBND naturally generates more income but accepts additional credit and volatility risk. Conversely, VGIT’s conservative strategy—investing exclusively in intermediate-term U.S. Treasury securities—sacrifices yield for government-backed certainty.

For retirees or conservative investors drawing regular income from their portfolio, FBND’s higher yield presents genuine appeal. However, this income advantage must be weighed against the higher expense ratio, which partially offsets the yield benefits.

Risk & Performance Comparison: Understanding Drawdowns in Different Bond Allocations

Historical performance data provides sobering perspective on the risk dimension. Over the trailing five years, FBND experienced a maximum drawdown of -21.24%, meaning investors who bought at the peak saw their investment decline by more than one-fifth before recovery. VGIT’s maximum drawdown reached -18.91%—approximately 2.3 percentage points less severe.

Growth calculations further illustrate this risk differential: a $1,000 investment in VGIT over five years would have grown to approximately $864, while the same investment in FBND would have reached $852—a $12 difference reflecting the tighter correlation of Treasury-only bonds to interest rate movements. Meanwhile, VGIT’s lower beta of 0.16 (versus FBND’s 0.28) indicates it experiences roughly half the price volatility of the broader market.

These metrics clarify an essential truth: lower-risk Treasury-focused bond ETF strategies deliver more stable, predictable returns, albeit at the cost of reduced income generation. The choice hinges on whether you can tolerate drawdown risk in exchange for higher yield potential.

Portfolio Construction: What Sets These High Yield and Treasury Bond ETF Funds Apart

The internal composition of these funds reveals why their performance and risk profiles diverge so significantly. VGIT maintains straightforward simplicity: 100% allocation to U.S. Treasury securities in the intermediate maturity range (roughly 3-10 year bonds). This focused strategy ensures every holding carries the full backing of the U.S. government, making default risk virtually nonexistent.

FBND takes a fundamentally different approach, holding 2,742 individual bonds across government, corporate, and other fixed-income sectors. Its largest positions include debt from JPMorgan Chase, Bank of America, and Goldman Sachs—yet each represents less than 1% of the portfolio, ensuring genuine diversification. This broader construction aims to capture higher yields across the credit spectrum while spreading risk across numerous issuers and sectors.

The diversification in FBND’s high yield bonds allocation comes with trade-offs. Holding corporate debt introduces credit risk—the possibility that issuers face financial distress and fail to meet payment obligations. VGIT eliminates this concern entirely by staying exclusively in government territory. For risk-averse investors, this structural difference alone may justify VGIT’s selection, regardless of cost or yield considerations.

Managing 1-Year Returns and Recent Performance

As of early January 2026, VGIT returned 4.2% over the trailing twelve months, slightly outpacing FBND’s 3.8% return. This recent outperformance contradicts the longer-term yield advantage enjoyed by the high yield bonds alternative represented by FBND, suggesting that recent interest rate and credit conditions have favored government-only positioning.

This fluctuation reminds investors that short-term performance rarely predicts long-term outcomes. A fund’s recent outperformance in one market environment may reverse entirely when conditions shift—particularly if corporate credit spreads widen or Treasury yields decline.

Making Your Choice: Which Bond ETF Aligns With Your Investment Goals

The decision between VGIT and FBND ultimately depends on your specific circumstances and priorities. Consider VGIT if you prioritize:

• Minimal costs: The 0.03% expense ratio preserves capital with exceptional efficiency
• Government-backed security: Treasury-only exposure eliminates credit risk entirely
• Stability: Lower volatility and smaller historical drawdowns reduce portfolio turbulence
• Simplicity: A focused strategy easy to understand and monitor

Consider FBND if you prioritize:

• Higher income: The 4.7% yield supports substantial regular distributions
• Diversification: Exposure across multiple credit sources and sectors
• Longer-term objectives: Willingness to accept drawdown risk for yield premium
• Broad fixed-income exposure: Preference for encompassing multiple bond types

For most conservative investors, VGIT’s combination of ultra-low costs and Treasury-backed security offers compelling logic. The 0.03% expense ratio is nearly impossible to match, and government bonds have protected wealth for centuries. However, investors truly seeking high yield bonds within an ETF structure may find FBND’s 4.7% yield and diversified bond allocation sufficiently attractive to justify the higher fee and volatility.

Neither choice is objectively correct—both VGIT and FBND serve legitimate investor needs. The superior bond ETF for you depends entirely on how you balance cost, risk, income, and diversification in pursuit of your financial goals.

Understanding Key Investment Terms

ETF (Exchange-Traded Fund): An investment fund holding a basket of assets that trades throughout the day like a stock, offering both diversification and liquidity.

Expense Ratio: The annual percentage fee charged by a fund to cover operating costs, expressed as a percentage of average assets under management.

Dividend Yield: The annual cash income distributed to shareholders, expressed as a percentage of the fund’s current market price.

Beta: A statistical measure showing how a fund’s price moves relative to a benchmark (typically the S&P 500); a beta below 1.0 indicates lower volatility than the broader market.

AUM (Assets Under Management): The total market value of all securities and cash held within a fund.

Maximum Drawdown: The steepest peak-to-trough decline experienced over a specific period, showing the worst historical loss an investor could have experienced.

Intermediate-Term Bonds: Debt securities maturing in approximately 3-10 years, balancing interest-rate sensitivity with income generation.

Corporate Bonds: Debt securities issued by companies to raise capital; typically offer higher yields than government bonds but carry greater credit risk.

U.S. Treasuries: Debt securities issued by the federal government, backed by taxing authority and considered among the lowest-risk investments globally.

High Yield Bonds: Fixed-income securities offering above-average yields but carrying elevated credit risk due to issuer financial quality.

Fixed-Income Allocation: A portfolio’s bond holdings, intended to provide stable income, capital preservation, and diversification from stocks.

Total Return: Investment performance combining price appreciation with all interest and dividend income, assuming reinvestment of distributions.