AGG Is a Great Choice for Most, but I Like This Vanguard ETF Better

That said, the Vanguard Total Corporate Bond ETF (VTC -0. 16%) is a better option for long-term investors on a risk/reward basis

Aggregate Bond ETF The stated aim of this ETF is to "track the investment results of an index composed of the total U

Investment-grade bond market. " As such, it holds high-quality debt deemed to have a relatively low default risk

As you might expect, and indeed hope for, the majority of this bond ETF's assets are invested in U

Treasuries and government-backed mortgages

Data source: is presentations. *Substantive holdings in corporate bonds in industrial, financial, and utility company bonds

It's exactly the of bond fund that risk-averse investors might want to include in their portfolio to help balance the rising levels of risk faced by their equity holdings

Vanguard Total Corporate Bond ETF The Vanguard Total Corporate Bond ETF owns investment-grade corporate debt, but a similar mix of corporate debt to that held by the is ETF

Data source: Vanguard presentations

Investors buy bonds and often gauge their yields based on a perception of risk

Treasuries have been considered among the lowest-risk bonds available

After all, the world economy would ly be in very serious trouble if the U

Defaulted on its debt

That's why other bonds, including the corporate bonds held in the Vanguard Total Corporate Bond ETF, tend to trade at higher yields

Those higher yields reflect their greater default risk

The chart below, which displays their 12-month trailing yields, also illustrates this point

AGG Dividend Yield data by YCharts

Given the seemingly ever-rising levels of public debt in the U. -- an issue that has been criticized by Elon Musk among others -- and the costs of servicing that debt, investors are entitled to ask who they trust more to demonstrate financial discipline in response to potentially rising interest rates: corporations or the U

Rising public debt Interest rates on public debt could rise simply due to the need for more of it to be issued to support rising debt servicing levels and more spending

Meanwhile, increasing public debt may encourage investors to shy away from holding dollar-denominated assets or reduce the weighting of their assets held in dollars

That could be a negative for the value of the U

Image source: Getty Images

Interest rates (Treasury yields) are not good news for corporate America, as they will push corporate bond yields up (and send corporate bond prices down)

However, there are a couple of things to bear in mind: Many U

Corporations are global in scope and earn money internationally, too, so all things being equal, a weakening of the dollar will imve their ability to cover interest payments on dollar-denominated debt

The argument here is a relative shift in risk; if government debt becomes relatively riskier, all things being equal, corporate debt should become more attractive

To put it succinctly, the spread between the yields on investment-grade corporate debt and public debt will get smaller, and so will the spread between these two ETFs

Fundamental Chart data by YCharts

Indeed, this spread tightening is one reason why the Vanguard ETF has outperformed the is ETF in recent years

AGG Total Return Level data by YCharts

A better ETF to buy If you the view that U

Public debt is ly to keep rising, then it makes sense to expect the market to price that risk in

If you also the view that this will lead to investment-grade corporate bonds outperforming, then the Vanguard ETF is a better option

Lee Samaha has no position in any of the stocks mentioned

The Motley Fool has no position in any of the stocks mentioned

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