The Vanguard Short-Term Treasury Index Fund (Admiral Shares) (symbol VSBSX) and the Vanguard Short-Term Treasury ETF (symbol VGSH) are two of the largest and most popular short-term bond index funds. Some compare VSBSX vs VGSH not realizing that they are just two different share classes of the same portfolio.
A quick reminder that this site does NOT provide investment recommendations. Fund comparisons (such as this one) are not conducted to identify the “best” fund (since that will vary from investor to investor based on investor-specific factors). Rather, these fund comparison posts are designed to identify and distinguish between the fund details that matter versus the ones that don’t.
The Short Answer
VSBSX and VGSH are different share classes of the same portfolio. The decision to buy one or the other depends on investor-specific factors (some of which are listed below).
The Longer Answer
Vanguard ETFs are structured as share classes of their mutual funds. This is a patented structure that is scheduled to expire in 2023, so we may see this structure more frequently in the near future. In other words, VSBSX and VGSH are not two funds pursuing an identical strategy; they are the same fund! Read more about Vanguard’s share class structure and the potential benefits.
Historical Performance: VSBSX vs VGSH
Both VGSH and VSBSX were launched in late 2009. Perhaps not surprisingly, performance has been nearly identical since their common inception date: .72% vs .71% annually. Despite changes in fees and expenses over that time period, the cumulative difference in performance over that time period is only about 20 basis points! Looking at the chart of VSBSX vs VGSH below, it is obvious that they are identical.
Risks of Fixed-Income ETFs
One of the risks of fixed-income ETFs is that they trade well below their net asset value (NAV) in times of distress. This occurred with many bond funds during the covid crisis, including some of Vanguard’s flagship bond funds. Interestingly, this is not what occurred with VGSH during that time. The below chart shows that VGSH began trading at a premium to VSBSX. Remember, these are simply different share classes of the exact same fund! However, VGSH trades at a market price and VSBSX is traded at a NAV.
These deviations are generally caused by the fact that fixed-income typically trades at wide bid-ask spreads, which widen even further during market volatility. Sometimes the bids will disappear altogether. Mutual funds generally publish a NAV based on market prices (or estimated values for fixed-income), so estimating a NAV is difficult if the market freezes or bids disappear, although that does not appear to be the case with these two funds in March 2020.
The consensus is that ETFs provide better “price discovery” than mutual funds, since ETFs represent actual market prices. In this example, it is widely assumed that the VGSH value was closer to value of the underlying portfolio than the VSBSX NAV. Interestingly, holders of VGSH could have sold their holdings and rotated into VSBSX (which is the exact same portfolio) at a slight discount.
Differences Between VSBSX and VGSH
Since the two funds are actually two share classes of the same fund, I will skip the usual comparisons here. The geographic exposures, sector weights, market cap coverage so on is identical because the two funds are shares in the same portfolio. There are some resources on the internet indicating otherwise, but these are incorrect.
Factors to Consider
Transaction Costs
ETFs are free to trade at many brokers and custodians, including Vanguard. However, many brokers and custodians still charge commissions and/or transaction fees to buy/sell mutual funds. To my knowledge, Vanguard does not participate in the pay-to-play arrangements that would allow their mutual funds to trade for free on many platforms. So if an investor account is at Vanguard, it is free to trade VSBSX or VGSH. However, only VGSH is free to trade in non-Vanguard accounts.
There is a bid-ask spread when trading ETFs, but this spread is typically less than .02% for VGSH and individual investor trades will not generally be large enough to “move” the market. In the case of VGSH, individual investors should not have a problem trading.
Tax Efficiency & Capital Gain Distributions
ETFs are typically more tax-efficient than mutual funds, due to their ability to avoid realizing capital gains through like-kind redemptions (a process that is beyond the scope of this post). However, since Vanguard ETFs are a share class of their mutual funds, the mutual funds are able to benefit from this feature of the ETF. In other words, VGSH is able to extend its tax benefits to VSBSX.
One additional consideration is that fixed-income ETFs are not quite as tax-efficient as equity ETFs. Both VSBSX and VGSH have made a capital gains distributions in the past. I noticed some posts on the internet saying that VGSH is more tax-efficient than VSBSX, but this incorrect.
Tax Loss Harvesting
My personal preference is to keep a portfolio entirely mutual funds or entirely ETFs, due to the mechanics of settlement during tax loss harvesting. If an ETF has declined in value and an investor sells it, the trade and cash proceeds will not settle for two business days (T+2). That investor may want to “replace” the sold ETF immediately and attempt to buy another ETF or mutual fund simultaneously.
However, mutual funds settle on T+1 basis, so cash for the mutual purchase would be due in one business day (which is one day earlier than the cash from the ETF sale is received). This can obviously cause problems and (even though this issue can be addressed with careful planning) I find it easier to keep accounts invested in similar vehicles. In this case, if a portfolio is all mutual funds, I might lean more towards VSBSX. If all ETFs, I might lean more towards VGSH.
On this topic, investors should probably avoid using these two funds as tax loss harvesting substitutes for one another since they would likely be considered “substantially identical.”
Tradability
VSBSX does have a stated minimum initial purchase of $3,000, so that may be a factor for some investors looking to initiate a position. The minimum purchase size for VGSH is typically one share, although fractional shares are becoming more common.
Investors can trade ETFs intraday, as well as in the pre-market and after-hours trading sessions. Investors can only buy/sell mutual funds once per day. This is not necessarily a major factor for long-term investors however.
Final Thoughts: VSBSX vs VGSH
VSBSX and VGSH are literally the same portfolio. However, I personally shy away from fixed-income ETFs due to their tendency to trade below NAV during episodes of extreme volatility (even though that was not the case with VGSH and VSBSX during the covid crisis). If two options provide the same risk and return, but one does not have a higher risk of periodic blowups then I’ll go with that one. Of course, there are other factors to consider (such as the above).
