Seeking Higher Bond Returns? Why Intermediate-Term Corporate Bonds Might Be Your Answer

For income-seeking investors, the eternal dilemma is simple: how do you squeeze more yield out of your portfolio without taking on excessive risk? The bond market offers a potential solution, but it’s far more nuanced than many realize. The Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ: VCIT) represents one approach to threading that needle—offering what many consider the optimal balance between yield potential and downside protection.

Understanding the Bond Risk Spectrum

Before diving into why intermediate-term corporate bonds deserve consideration among the best corporate bond funds, it’s critical to understand what risks you’re actually taking on.

Bonds are deceptively complex instruments. Unlike stocks, where all shares of a company are identical, each individual bond is its own unique security with distinct characteristics. The bond market itself dwarfs the equity market in size, yet many investors approach it with oversimplified thinking.

Two primary risk dimensions dominate bond investing:

Issuer Risk poses the fundamental question: Can the borrower actually repay? U.S. Treasury bonds sit at one extreme—backed by the government’s ability to create currency, though at inflation’s cost. Investment-grade corporate bonds occupy the middle ground, issued by companies with fortress balance sheets and strong credit ratings. High-yield bonds occupy the riskier end.

Duration Risk reflects time itself as a risk factor. Longer-duration bonds carry elevated risk because more can go wrong over extended periods. Inflation erodes the real value of future interest payments. Market conditions shift. The borrower’s financial health deteriorates. Shorter bonds insulate you from these decades-long scenarios.

This is where intermediate-term corporates enter the picture—they’re positioned between the safety-but-lower-yield world of Treasury bonds and the higher-yield-but-more-volatile world of longer-duration corporates.

The Yield Advantage: Where Corporate Bonds Win

Consider the empirical comparison between the Vanguard Intermediate-Term Corporate Bond ETF and its Treasury counterpart, the Vanguard Intermediate-Term Treasury Bond ETF (NASDAQ: VGIT).

Over the past decade, price performance between these two has tracked remarkably similarly. Yet total return—when dividends are reinvested—tells a starkly different story. VCIT currently generates approximately 4.4% in dividend yield, compared to VGIT’s roughly 3.7%. That 70-basis-point advantage compounds substantially over years.

Why the spread? Corporations carry greater default risk than the U.S. government. To compensate investors for that risk, they offer higher yields. It’s a straightforward risk-reward tradeoff, and if you’re comfortable with investment-grade issuers, that yield premium becomes highly attractive.

The Duration Ladder: Short vs. Intermediate vs. Long

Within the corporate bond universe itself, maturity matters significantly. The data reveals an intuitive pattern:

• Vanguard Short-Term Corporate Bond ETF (NASDAQ: VCSH) offers the lowest yields but greatest price stability
• Vanguard Long-Term Corporate Bond ETF (NASDAQ: VCLT) provides the highest yields but maximum price volatility
• VCIT sits precisely in the middle on both dimensions

The past decade proved particularly punishing for longer-duration bonds as interest rates climbed. VCSH weathered the storm best, declining less than its longer-duration peers. VCLT absorbed the heaviest losses. VCIT positioned itself closer to VCSH on a risk basis—important for those uncomfortable with significant drawdowns.

Yet here’s where the intermediate approach becomes compelling: when examining total returns over the entire decade, accounting for dividend reinvestment, VCIT outperformed both VCSH and VCLT. The explanation is elegant. Short-term bonds sacrificed too much yield. Long-term bonds sacrificed too much price stability. The intermediate option captured the optimal combination.

Practical Implications for Your Portfolio

This analysis suggests VCIT functions as a “sweet spot” rather than an extreme positioning. If your investment horizon spans multiple years and your priority is balancing income generation against capital preservation, intermediate-term corporate bonds deserve serious consideration among the best corporate bond funds available.

The strategy works best for investors who:

• Prioritize steady income over capital appreciation
• Can tolerate modest price fluctuations (less than long-term bonds, more than short-term)
• Maintain a multi-year holding period
• Prefer investment-grade credit quality over speculative yields

For those with shorter time horizons or those fearful of any portfolio volatility, this approach may prove uncomfortable. Conversely, investors with decades until retirement and high income needs may find VCIT an exceptionally valuable core holding.

The intermediate-term corporate bond ETF won’t be optimal for every situation, but for the investor seeking to maximize sustainable income while managing portfolio risk responsibly, it represents a thoughtfully constructed middle path.