VCIT Tops IEI on Yield and Duration Trade

Vanguard Intermediate-Term Corporate ETF (VCIT) currently presents a higher income profile than iShares 3-7 Year Treasury ETF (IEI), forcing institutional allocators to re-evaluate the role of intermediate credit versus short-intermediate Treasuries in 2026. As of April 24, 2026, VCIT's 30-day SEC yield was 5.12% versus IEI's 4.11% (Vanguard and BlackRock factsheets, Apr 24, 2026), a spread that materially affects expected coupon income for a representative $100m bond sleeve. The choice between VCIT and IEI is not binary: it hinges on explicit trade-offs — incremental yield, credit exposure, effective duration, and liquidity opacity in stress. This piece examines those dimensions with specific data points, historical context and implications for portfolio construction, and presents a Fazen Markets Perspective that challenges the conventional "safety-first" tilt for intermediate sleeves.

Context

The macro-rate backdrop entering Q2 2026 is the starting point for the VCIT vs IEI comparison. The Federal Reserve's policy rate target remained in the 5.25%–5.50% range following the March 19, 2026 FOMC decision, and market-implied terminal rate probability has tightened since early 2025 (Federal Reserve, FOMC statement, Mar 19, 2026). Higher-for-longer policy has elevated nominal yields across the curve and compressed compensation for duration in short-intermediate Treasuries relative to corporate credit, producing the observed yield gap between VCIT and IEI. For investors focused on income generation, that yield gap is the primary driver of asset-allocation shifts: put simply, how much incremental yield is worth taking in credit and duration.

Institutional portfolios frequently split the intermediate bond sleeve into short-intermediate Treasuries for capital preservation and corporates for spread income. IEI (3–7 year Treasury exposure) offers near-benchmark duration and sovereign credit, while VCIT (intermediate corporate) provides exposure to investment-grade credit with higher coupons but wider liquidity and credit event risk. Historically, during tightening cycles, corporates have outperformed duration-only sleeves on a carry-adjusted basis; conversely, in sharp risk-off episodes Treasuries typically widen their relative performance. The past 12 months illustrates this: VCIT's one-year total return (to Apr 24, 2026) was approximately +7.3% versus IEI's +2.4% — reflecting both higher carry and tighter corporate spreads (Bloomberg aggregated returns, Apr 24, 2026).

From a governance perspective, the debate centers on role clarity in multi-asset portfolios. If the bond sleeve's mandate is income maximization with limited drawdown tolerance, the additional 1.01 percentage point in SEC yield from VCIT (5.12% vs 4.11%) changes the optimization calculus. If the mandate prioritizes volatility control and duration-limited capital preservation, IEI's sovereign profile and lower effective duration (see Data Deep Dive) remain compelling. Importantly, this is not a permanent arb — yield spreads and Fed expectations evolve — so dynamic policy and tactical tilts are necessary.

Data Deep Dive

Yield and carry are the most transparent metrics for immediate comparison. Specific data points (all as of Apr 24, 2026): VCIT 30-day SEC yield 5.12% (Vanguard factsheet, Apr 24, 2026); IEI SEC yield 4.11% (BlackRock factsheet, Apr 24, 2026). That 101 bps pick-up in SEC yield translates into meaningful additional coupon income on institutional allocations. For a $100m allocation, a static yield difference of 101 bps equates to roughly $1.01m of incremental annual income before fees and credit risk. Expense ratios are minor relative to yield but not immaterial for scale: VCIT's net expense ratio is 0.04% versus IEI's 0.06% (fund prospectuses, Apr 2026), slightly favoring Vanguard on cost.

Duration and convexity determine price sensitivity to rate moves. VCIT's effective duration sits around 6.4 years versus IEI's approximately 3.9 years (issuer analytics, Apr 24, 2026). That 2.5-year duration gap implies roughly 2.5x higher rate sensitivity for VCIT on parallel shifts; in a 100 bp parallel move, VCIT's price change would be materially larger than IEI's. Credit composition further differentiates the funds: VCIT holds predominantly investment-grade corporates with an average credit quality in the A/Baa1 region and an allocation to BBB names of roughly 28% (Vanguard holdings report, Apr 24, 2026), while IEI holds essentially zero corporate credit, being Treasury-only. The portfolio-level convexity profile and credit beta therefore must feed into stress-testing and scenario analyses.

Spread behavior under stress is the hidden cost to the yield advantage. Using historical vintages, a 2008-like credit shock would likely widen IG spreads by several hundred basis points, quickly eroding VCIT's carry advantage and reversing returns; conversely, mild recession scenarios historically see narrower relative spread widening. Over the 12-month horizon ending Apr 24, 2026, corporate spreads tightened by approximately 35 bps (Bloomberg IG index, Apr 24, 2026), supporting VCIT's positive relative returns during that period. Institutions should therefore model both idiosyncratic corporate default pathways and systemic flight-to-quality scenarios when quantifying expected utility of the additional yield.

Sector Implications

For corporate treasury managers and liability-driven investors, the VCIT vs IEI trade has tangible balance-sheet implications. Corporates that hedge interest rate risk with duration-matched Treasuries may find VCIT a pragmatic replacement where income generation is prioritized, but pension funds and insurers with stringent duration-matching rules may maintain IEI or similar Treasury sleeves to avoid asset-liability mismatches. From a peer comparison standpoint, VCIT's 1-year alpha against treasury-focused sleeves has raised questions about whether traditional benchmarks (BAML US Treasury indices) remain optimal reference points for performance evaluation.

Asset managers face distribution and client suitability challenges. Institutional clients often expect capital preservation within intermediate sleeves; replacing IEI with VCIT must be accompanied by updated risk budgets, revised mandate language, and enhanced liquidity management. For cash-heavy corporate treasuries, the additional yield in VCIT can reduce net interest expense by an amount relevant to corporate financing costs — in numerical terms, a $50m deployed to VCIT vs IEI could deliver roughly $505k more annual income at the current spread (101 bps), a non-trivial line-item for CFOs managing cash returns versus funding costs.

Index and benchmark providers may see shifts in inflows as allocators rebalance for income. If flows persist toward corporate intermediates, secondary-market liquidity patterns could shift, compressing credit spreads further and reducing the relative advantage. Conversely, a surprise policy pivot by the Fed—either an earlier easing cycle or recession—could reverse flows back to Treasuries, widening corporate spreads. These dynamics are non-linear and will likely create episodic re-pricing windows for both ETFs.

Risk Assessment

Principal risks when choosing VCIT over IEI are credit deterioration, spread widening, and higher duration-induced volatility. VCIT's exposure to BBB credit (circa 28% of holdings) concentrates risk at the lower end of investment grade where downgrades cluster during downturns, increasing default and downgrade probabilities. Scenario analysis should incorporate both rating migration and default-severity matrices: a 150–200 bps spike in IG spreads, combined with rising defaults for BBB cohorts, can eliminate the current yield advantage and deliver negative total returns over 6–12 months.

Liquidity and market microstructure are secondary but relevant concerns. While both ETFs are large and liquid in primary markets, corporate bond liquidity in stress is weaker than Treasury liquidity; ETF price-to-NAV deviations can widen during episodes of corporate selloffs. Authorized participant activity and creation/redemption mechanics will matter for large institutional trades. Mitigants include staggered execution, use of futures overlays for temporary duration adjustment, and reliance on acceptable bid-ask spreads during rebalancing.

Regulatory and accounting considerations also play a role. For some insurance and bank portfolios, regulatory capital and eligible asset criteria favor sovereign or high-quality public debt. Reallocating to VCIT could have balance-sheet and capital charge impacts, depending on jurisdiction and accounting regimes. Institutions must therefore overlay regulatory capital models and consult prudential guidance before materially shifting sleeves.

Outlook

Looking ahead to H2 2026, the magnitude of the VCIT advantage will depend on three variables: terminal Fed rate expectations, corporate default dynamics, and macro growth momentum. If the Fed holds rates steady and corporate fundamentals remain stable, the income advantage and tighter spreads could support continued relative outperformance for VCIT versus IEI on a carry-adjusted basis. Alternatively, a growth shock that triggers a rush to safety would favor IEI, particularly given its lower duration and sovereign liquidity premium.

For tactical allocators, a blended approach — a core Treasury sleeve for liquidity plus a satellite corporate allocation sized to risk appetite — is likely to persist as best practice. Dynamic rebalancing triggers tied to spread levels (for example, exit the satellite if IG spreads widen by more than 100–150 bps from current levels) can institutionalize discipline and preserve capital in stress. Tools such as interest-rate hedges, credit default swap overlays, or futures-based duration swaps can be used to keep the income while managing directional rate risk.

Fazen Markets Perspective

Contrary to a binary yield-versus-safeguard narrative, Fazen Markets sees the current VCIT-IEI spread as an opportunity to re-architect the intermediate sleeve around explicit economic regimes rather than static labels. For portfolios that historically default to Treasuries on the premise of "safety," the present 101 bps SEC yield pick-up in VCIT suggests a partial reweighting could materially improve carry without fundamentally altering liquidity if executed with governance guardrails. Our non-obvious insight is that, when the yield curve is flat-to-steep and policy is priced for stability, corporate credit offers asymmetric carry benefits with manageable downside if institutions adopt active spread-stop rules and integrate credit-cycle indicators into rebalancing.

Practically, this means instituting pre-defined quantitative triggers tied to both nominal yields and spread widening (e.g., rebalancing when the VCIT-IEI yield spread moves beyond historical one-standard-deviation bands) and using duration overlays to isolate credit from rate exposure. We believe that for many institutional investors the incremental income is worth exploring on a controlled basis, provided operational readiness is in place for liquidity friction and downgrade stress. For long-duration liabilities, a pure Treasury approach remains appropriate; for intermediate-duration balance-sheet sleeves with income mandates, a calibrated allocation to VCIT merits active consideration.

Bottom Line

VCIT currently delivers a meaningful income premium (approx. 101 bps as of Apr 24, 2026) versus IEI but brings greater duration and credit risk; the choice should be driven by mandate clarity, stress-testing, and governance rules. Institutions can capture income upside through disciplined, trigger-based allocations while hedging undesired duration or spread exposures.

Disclaimer: This article is for informational purposes only and does not constitute investment advice.

FAQ

Q: What is the historical one-year spread change between VCIT and IEI? A: Over the 12 months to Apr 24, 2026, the SEC yield gap expanded by roughly 65–75 bps from levels a year earlier, driven by spread tightening in corporates and a modest change in Treasury short-term yields (Bloomberg yield series, Apr 24, 2026). This magnified VCIT's carry advantage over the period.

Q: How should an allocator size a VCIT sleeve versus IEI for an income mandate? A: A practical sizing approach ties allocation to risk budget: for example, commit up to 20–40% of the intermediate sleeve to VCIT as a satellite, with explicit spread-widening stop-losses (e.g., exits at +100–150 bps spread expansion) and duration hedges to limit rate exposure. Historical scenario modeling and regulatory overlays must be applied on a case-by-case basis.

Q: Are there cheaper or more targeted alternatives to VCIT for a similar yield profile? A: Yes — laddered individual investment-grade corporates, credit indices with selective sector tilts, or active IG ETFs with different duration targets can offer similar yield profiles with varied liquidity and alpha potential. Consider operational capacity for credit selection and secondary-market execution before deviating from large passive ETFs.

Internal resources: see our fixed income primer and recent rates strategy notes for implementation frameworks.