Vanguard VCLT vs. VGLT: Which Long-Term Bond ETF Deserves Your Portfolio?

In the fixed-income market, experienced and novice investors alike can benefit from a refresher. Here's a reminder: When investing in bonds, the two primary forms of risk to consider are credit and interest rate risk.

Even with mountains of debt, the U.S. carries some of the highest sovereign credit ratings in the world, so income investors considering exchange-traded funds (ETFs) such as the Vanguard Long-Term Treasury ETF (NASDAQ: VGLT) don't worry much about credit issues. But with long-term bonds, interest rates are paramount.

When it comes to corporate bonds and funds such as the Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT), end users must consider both credit and rate risk. After all, some issuers default, leaving bondholders with pennies on the dollar, if that.

With that said, let's look at two of the giants of the Vanguard bond stable to pin down which one might merit a place in your portfolio.

Make the corporate call for more income

For investors seeking extra income, corporate bonds are a fine asset class to consider. The $8.4 billion Vanguard Long-Term Corporate Bond ETF embodies that spirit, as evidenced by its 30-day SEC yield of nearly 6%.

That's high, given that approximately 56% of this ETF's 2,778 holdings are rated AA or A, confirming it is an investment-grade ETF. As such, credit risk is somewhat subdued. The yield and the stout credit sound pretty good, but smart investors are probably wondering what the "but" is with this ETF. It's simple and revealed in its name: This is a long-duration ETF.

The average duration for this ETF's holdings is 12.2 years. For the sake of simplicity, let's call it 12 years. This means that in a hypothetical scenario in which the Federal Reserve raises interest rates by 1% over a series of meetings with no reductions to offset those hikes, a bond (or this ETF) with a duration of 12 years loses 12% of its value.

That's not a knock on this corporate bond ETF, but it is a statement of obvious risk. Consider this fund and others like it as reminders that there are no free lunches in investing. Meaning 6% yields aren't given away without investors accepting some risk. In this case, it's rate risk.

In addition to the tempting yield, this ETF has some high points, including a deep bench of holdings and an annual fee of just 0.03%, making it one of the cheapest bond ETFs of any stripe.

A patriotic play

As its name implies, the Vanguard Long-Term Treasury ETF holds Treasury bonds. Ninety-nine of them, to be precise. Even with Uncle Sam's impressive credit rating, this Vanguard fund lobs off a yield of almost 5.1%. That seems pretty high for an ETF with essentially no credit risk. So what gives?

As with the corporate bond fund, the Treasury ETF's name reveals the issue. It, too, is a long-term bond fund. In this case, the average holding duration is 13.8 years. Call it 14 years, and for every 1% rise in rates, a bond or fixed-income fund with a duration of 14 years loses 14%.

That's a reminder about the rough road of recovery math. A $100 bond that loses 14% is worth $86, meaning it has to gain more than 16% just to get the investor back to breakeven.

Of course, duration cuts both ways, and if the Fed surprises with a string of rate cuts, this ETF and its corporate counterpart would rally. Plus, the Vanguard Long-Term Treasury ETF is among the least expensive bond ETFs to own, with an annual expense ratio of 0.03%.

And the winner is...

Well, it depends on individual investors' risk tolerances and where they're at in life. Hopefully and hypothetically, the bond market will "play ball" with investors in the coming years, and there won't be significant spikes in Treasury yields that expose the vulnerabilities of long-duration debt.

Assuming a more sanguine rate environment plays out, the Vanguard Long-Term Treasury ETF is a fine idea for retirees and those close to retirement, thanks to its dependable income stream and lack of credit risk.

On the other hand, the Vanguard Long-Term Corporate Bond ETF is arguably more appropriate for those with longer retirement runways, as well as for long-term investors who currently have limited or no fixed-income exposure.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.