TLT vs. Shorter-Duration Bond ETFs: Which Should You Buy in Your Portfolio?

It’s time for conservative, older investors to start thinking about their bonds. Indeed, bonds aren’t an exhilarating asset class. Whenever you hear about action in the bond market, it’s often about how it’ll affect the stock market. At the end of the day, it’s stocks that are the biggest drivers of wealth, with the best returns delivered over prolonged periods. That said, higher rewards accompany higher risk, and it’s these risks that may be too elevated for the retired or those who expect to retire in the near future.

Though the Federal Reserve has cut interest rates a good number of times in the past year, it’s notable that rates are still rather elevated, especially if you’re used to the era of rock-bottom rates prior to 2021. To put it simply, you can score some pretty decent low-risk returns going into 2025.

Of course, there are some opportunity costs of investing in bonds instead of the stock market that should be considered. In any case, many retirees opt to have some percentage mix of stocks to bonds. And if you’re looking to top up the bond side of your portfolio, the following high-quality bond exchange-traded funds (ETFs) are worth a look today. Here are two of the more popular picks and the differences between them:

iShares 20+ Year Treasury Bond ETF

iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT | TLT Price Prediction) may very well be the most popular long-duration bond ETF out there. Indeed, you’ve probably heard of “the TLT” being discussed on your favorite financial television program. The TLT is very sensitive to interest rate fluctuations and can be a riskier bet for investors who are wrong about their expectations for where rates will head next. If you expect interest rates to fall from here (the Fed is in cutting mode, after all), the TLT could prove a solid bet.

However, just because the Fed is cutting doesn’t mean it won’t pause or even reverse course in the medium term. The Fed has been a tad more hawkish in tone with its latest commentary. And given the likelihood we won’t see the days of rock-bottom rates again (the Fed may not be willing to cut that far), the TLT may take a long time before it fully recovers (shares down more than 48% from their 2020 highs).

With an attractive 3.92% yield, though, the TLT is enticing for retirees seeking steady passive income. However, more yield typically accompanies more risk. And in the case of the TLT, I do think the risks could have the potential to be considerable, especially if the Fed pauses rate moves and pivots in the direction of hikes, perhaps in response to inflationary data that could come to be in 2025.

At the same time, a stock market crash that brings forth the need for emergency rate cuts could act as a shot in the arm for the TLT, making it a great portfolio hedge despite the added interest rate risks.

If you want to take on less rate risk and seek a less-choppy passive income option, a shorter-duration bond ETF could be more your cup of tea.

Vanguard Short-Term Treasury Index ETF

Vanguard Short-Term Treasury Index ETF (NASDAQ:VGSH) is a less-risky, high-quality bond ETF that also has less upside potential. Shares are down less than 7% from their 2020 peak, far less than the nearly 50% decline experienced by the TLT.

With a nice 4.13% yield and an average bond duration of 1.9 years, the VGSH ETF stands out as a “safer” option for retirees to park cash in. It’s an incredibly liquid ETF with millions of shares trading hands on any given day. So, if you’re seeking less rate sensitivity (it’s hard to know for sure where rates will go in the next several years), less volatility, and a still-respectable yield, the VGSH may be the better bet.

As always, consult a financial advisor who may be able to fit both long- and short-duration bond ETFs as part of a diversified portfolio.