Short-Term Bond ETF Showdown: Municipal or Corporate Bonds for Your Portfolio?

When building a balanced investment portfolio, short-term bond ETFs serve as essential stabilizers—they provide steady income, reduce volatility, and act as a buffer during market downturns. Two prominent choices stand out for investors seeking this exposure: Vanguard’s corporate bond offering and VanEck’s municipal bond option. But which aligns better with your financial goals? Understanding the differences between these approaches will help you make a more informed decision.

Cost Efficiency and Income Generation Matter

The first consideration for most investors is the expense ratio—how much you pay annually to hold the fund. Vanguard’s corporate bond ETF (VCSH) charges just 0.03% per year, while VanEck’s muni etf (SMB) comes in at 0.07% annually. While the difference seems marginal, over decades of investing, that 0.04% gap compounds significantly.

More immediately impactful is the income generated. VCSH currently yields 4.3%, substantially outpacing SMB’s 2.6% dividend yield. This higher yield from corporate bonds reflects both the different risk profiles and the tax treatment of the two income streams. The muni etf’s lower yield stems from its tax-exempt advantage—the income it generates is typically free from federal income taxes and often state taxes too, making its after-tax returns competitive despite the lower nominal percentage.

For high-income earners in elevated tax brackets, a muni etf’s tax efficiency can offset the lower stated yield. For others, VCSH’s higher income generation provides more immediate cash flow without the tax consideration.

Understanding the Holdings: Corporate Bonds vs. Municipal Debt

The two funds take distinctly different paths in their portfolio construction. VCSH focuses exclusively on investment-grade corporate bonds—debt issued by financially stable, well-established companies like Bank of America and CVS Health. The fund maintains a diversified portfolio of 2,715 different bonds, providing broad exposure across the corporate landscape.

VanEck’s muni etf, by contrast, concentrates on short-term municipal bonds—debt issued by state and local governments, agencies, and public authorities to fund infrastructure, education, and other public needs. The fund holds 336 different municipal securities, with significant exposure to California-backed obligations. This municipal bond focus means the income flows to you tax-free at the federal level, and potentially at the state level depending on where you live and which bonds the fund holds.

The sector allocation for both funds is listed as 100% cash and other assets, indicating their focus on stable, short-duration instruments rather than equity exposure or longer-term obligations.

Recent Performance and Risk Metrics

Over the past year (as of late January 2026), VCSH delivered a 2.1% return compared to SMB’s 1.5% return—a meaningful 60 basis point advantage. Looking at longer timeframes, VCSH has consistently outperformed across the one-, three-, five-, and ten-year periods.

Examining risk through the lens of maximum drawdown over five years reveals that VCSH experienced a steeper decline at 9.50%, while SMB’s maximum drawdown was 7.42%. This difference reflects the inherent interest rate sensitivity of corporate versus municipal bonds in a rising rate environment.

If you invested $1,000 in each fund five years ago, VCSH grew to approximately $960 while SMB reached $958—nearly identical, demonstrating that despite different strategies, both serve the core portfolio role adequately.

Liquidity and Asset Under Management

Size matters when it comes to ETF investing. VCSH manages a substantial $46.9 billion in assets under management (AUM), making it highly liquid and ensuring tight bid-ask spreads. SMB’s muni etf operates at a much smaller scale with $302.1 million in AUM. This size difference means VCSH offers superior execution on buy and sell orders, though both funds remain reasonably liquid for most investors.

Real-World Application in Your Portfolio

Both funds serve similar roles in a well-constructed portfolio. They provide capital preservation, generate reliable income, and reduce portfolio volatility during stock market turbulence. Their short time horizons mean they’re far less sensitive to interest rate changes than longer-term bond funds—a significant advantage in uncertain rate environments.

Many financial advisors use short-term bond ETFs as enhanced alternatives to traditional savings accounts or money market funds, offering higher returns with minimal additional risk. The choice between corporate and muni etf exposure often comes down to your personal tax situation and income needs.

The Bottom Line

For investors prioritizing yield and recent performance, VCSH presents the more compelling case. Its lower expense ratio, higher dividend yield, superior 5-year track record, and substantially larger asset base create a stronger foundation for most investors. The muni etf approach works best for those in high tax brackets who benefit meaningfully from tax-exempt income and specifically want municipal bond exposure.

Both funds have operated for over 15 years and maintain excellent reputations from their respective managers. Either would serve adequately as a portfolio stabilizer. However, if you’re seeking consistent income generation, lower costs, and proven performance, Vanguard’s short-term corporate bond ETF edges out VanEck’s muni etf option for the typical investor seeking short-duration fixed income exposure.