Vanguard VCIT vs iShares IEI: Which Intermediate-Term Bond ETF Wins?

The choice between Vanguard's Corporate Intermediate-Term Bond ETF (VCIT) and iShares' 3-7 Year Treasury Bond ETF (IEI) defines a core allocation decision for fixed-income investors. With the Federal Reserve holding rates steady, yields remain elevated, making intermediate-term bonds a focal point for portfolio construction. VCIT offers exposure to investment-grade corporate debt, yielding approximately 5.1%, while IEI provides the safety of US government bonds with a yield near 4.2%. This 90-basis-point yield differential represents the premium investors demand for assuming corporate credit risk over Treasury security.

Context — why this comparison matters now

The intermediate-term segment is critical as it balances interest rate sensitivity with yield generation, a key consideration in a potentially plateauing rate environment. The last significant shift in this space occurred in late 2023 when the Fed signaled an end to its hiking cycle, causing intermediate bond ETFs to rally over 8% in the subsequent quarter. The current macro backdrop features a 10-year Treasury yield oscillating around 4.3% and persistent inflation data that has delayed expectations for near-term rate cuts. This has triggered a reassessment of credit risk premiums, making the choice between corporate and government debt more consequential for total return.

Data — what the numbers show

VCIT holds over 2,000 investment-grade corporate bonds with an effective duration of 6.2 years and an average yield to maturity of 5.4%. The ETF has amassed $53 billion in assets under management. IEI, with $15 billion in AUM, tracks a portfolio of US Treasury bonds with maturities between three and seven years, sporting a lower duration of 4.5 years and a yield to maturity of 4.3%. Performance data for the trailing year shows VCIT returning 6.8% versus IEI's 5.1%, highlighting the return advantage of corporate credit during a stable economic period.

Metric	Vanguard VCIT	iShares IEI
Yield	5.1%	4.2%
Duration	6.2 years	4.5 years
AUM	$53 billion	$15 billion
Expense Ratio	0.04%	0.15%

Vanguard's cost advantage is significant, with an expense ratio of 0.04% compared to iShares' 0.15%. This 11-basis-point difference compounds over time, directly impacting net returns for buy-and-hold investors.

Analysis — what it means for markets / sectors / tickers

VCIT's performance is closely tied to the health of the corporate sector, particularly large issuers in the banking and industrial segments. A strong earnings environment benefits VCIT, while economic contraction would widen credit spreads, hurting its relative performance. The primary risk for VCIT is a deterioration in credit conditions that could erase its yield advantage through price depreciation. IEI serves as a safe-haven asset, typically appreciating during flight-to-quality events. Institutional flow data indicates steady demand for IEI from pension funds and insurers seeking duration-matched, risk-free assets, while VCIT attracts yield-seeking mandates from multi-asset funds. The outperformance of VCIT is contingent on the avoidance of a recession.

Outlook — what to watch next

The next Federal Open Market Committee meeting on July 31 will provide critical guidance on the path of interest rates, directly impacting the valuation of both ETFs. The July 12 Consumer Price Index report will signal whether inflationary pressures are abating, a key factor for Treasury yields. Technical analysts monitor the 200-day moving average for both funds; a sustained break above this level could signal a bullish trend. The 4.5% level on the 10-year Treasury yield represents a key resistance point; a break above could pressure bond prices across the board, though IEI's government backing would likely make it more resilient than VCIT.

Frequently Asked Questions

What is the main difference between VCIT and IEI?

VCIT invests exclusively in US corporate bonds rated investment-grade, which carry credit risk but offer higher yields. IEI holds only US Treasury bonds, which are considered free of default risk but offer lower returns. The choice is fundamentally between earning a credit risk premium with VCIT or accepting sovereign safety with IEI. Corporate bonds are more sensitive to economic growth expectations, while Treasuries are more reactive to changes in interest rates and inflation.

How do interest rate changes affect these two ETFs?

Both ETFs decline in value when interest rates rise due to their positive durations, but the magnitude differs. VCIT's longer duration of 6.2 years makes it slightly more sensitive to rate changes than IEI's 4.5-year duration. However, in a rising rate environment driven by strong economic growth, VCIT's corporate holdings may see spread tightening, which can offset some of the rate-related price decline. IEI's price movement is purely a function of rate expectations.

Which ETF is better for a retirement portfolio?

The suitability depends on an investor's risk tolerance and time horizon. IEI is preferable for capital preservation and for investors concerned about economic instability. VCIT is appropriate for investors seeking higher income who can tolerate the potential for greater price volatility associated with corporate earnings cycles. A common strategy is to blend both ETFs to achieve a desired level of credit exposure while maintaining a core of government-guaranteed securities. For more on fixed-income allocation, see our guide on bond laddering strategies at `https://fazen.markets/en`.

Bottom Line

The superior choice hinges on an investor's conviction in continued economic expansion versus a preference for capital preservation.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.