BND and AGG: Comparing Bond ETFs

Bond exchange-traded funds (ETFs) are useful tools for modern fixed income investors. These ETFs combine the relative stability of bond mutual funds and portfolio diversification with the intraday liquidity of stocks. The best bond ETFs end up at low cost. In terms of asset management, the two kings in the bond ETF field are iShares Core US Aggregate Bond ETF (AGG) and Vanguard Total Bond Market ETF (BND).

As of August 2020, the total assets under management (AUM) of these two funds exceeded US$365 billion. This level of AUM is higher than other bond ETFs and far exceeds other investment-grade large-cap categories. So, when it comes to AGG and BND reviews, which bond ETF is better?

BND and AGG: Background

AGG is a product of BlackRock Inc. and is part of its successful iShares ETF series. It was launched in September 2003 and is the older of these two funds for three and a half years. With the support of all the resources of the world’s largest fund manager, this ETF does not lack recognition or marketing. Portfolio managers James Mauro and Scott Radell are responsible for the day-to-day operations of the ETF.

At the same time, Total Bond Market ETF is Vanguard’s outstanding domestic bond issuance product. In many ways, Vanguard Fund is the younger brother of iShares Fund. These two ETFs track the same index, albeit slightly different in execution, and provide healthy competition for low fees, safety and high returns.


Key points

  • Two bond exchange-traded funds that are frequently compared are iShares’ AGG and Vanguard’s BND funds.
  • Both funds are passively managed ETFs and follow the Barclays US Aggregate Bond Index. The average annual return for the past 10 years is similar, about 3.7%.
  • Although the performance of the two funds is almost the same, Vanguard’s BND is significantly larger, with assets under management (AUM) of $287.2 billion, while iShares’ AGG AUM is $78.9 billion.

BND and AGG: Strategy

Both funds are passively managed ETFs. The passive investment strategy aims to reduce the total cost of capital, thereby reducing investment costs. Prior to the BlackRock acquisition, AGG was a much more expensive and slow-moving fund, but competition has drastically reduced the costs of the two asset management companies.

Both ETFs track the Barclays US Aggregate Bond Index, which is the main measure of domestic bond performance, but Vanguard’s BND follows a floating-adjusted version of the index. The Barclays Aggregate Bond Index is a market value-weighted collection of the entire US bond market, excluding municipal bonds, Treasury Inflation Protected Securities (TIPS) and high-yield bonds.

BND and AGG: measurable data characteristics

The Vanguard Total Bond Market ETF manages more than $287.2 billion in assets, which is relatively large compared to the iShares ETF with an asset management scale of $78.9 billion. The average duration of the iShares ETF’s portfolio is slightly longer, at 6.6 years, compared to 5.86 years. Each is very similar in terms of weighted average maturity and yield to maturity (YTM).

The financial data of the two funds are very consistent. As of August 2020, the expense ratio of iShares Core US Aggregate Bond ETF (AGG) is 0.04%, while the expense ratio of Vanguard Total Bond Market ETF is 0.035%. They are the two most liquid bond ETFs, trading hundreds of millions of dollars a day in daily transactions.

BND and AGG: Basic Risks

As bond-backed funds, iShares Core US Aggregate Bond ETF and Vanguard Total Bond Market ETF indirectly face counterparty risk in their underlying investment portfolios. At first glance, the counterparty risk of iShares ETF is slightly lower because of its better credit quality. Although passive funds seem to be driving autonomously, each fund also faces some management risks.

Perhaps the bigger concern is the risk of inflation. Bond ETFs dominated by treasury bonds rarely produce the highest market returns. It is expected that shareholders will not be able to offset the 3% or 4% increase in the actual cost of living within a year. Interest rate risk is also a problem because the medium-term nature of these ETFs makes them more susceptible than short-term instruments.

BND and AGG: performance and expert opinion

The performance of the iShares Core US Aggregate Bond ETF and Vanguard Total Bond Market ETF over the past five years is almost the same. As of August 2020, the average annual return of iShares over the past 10 years was 3.73%, while Vanguard’s was 3.77%. During this period, iShares ETFs tend to be more expensive funds, so Vanguard ETFs may show stronger true performance by a small margin.

Expert opinions are almost always positive for these two funds, but they are rarely overwhelming. Morningstar awards four stars to each of these ETFs.

Ideal investor

Since the strategies, portfolios, benchmarks, performance and costs of iShares Core US Aggregate Bond ETF and Vanguard Total Bond Market ETF are so similar, no investor group is more suitable for one of them​​. Generally speaking, both types of funds are suitable as core assets for retirement-conscious investors, or as an accessory to investors who want to gain exposure to high-grade domestic bonds. Low yields and small returns make them unsuitable for younger or more aggressive traders.


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