Exchange-traded funds (ETFs) for bonds are a useful instrument for modern fixed-income investors.

These exchange-traded funds (ETFs) combine the relative stability and portfolio diversification of bond mutual funds with the intra-day liquidity of equities. And lastly, the best bond ETFs are cheap.

In terms of assets managed, two of the largest players in the bond ETF market are the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND).

The two funds’ total assets under management (AUM) were above $381 billion as of September 2023.

Compared to other bond ETFs and the rest of the investment-grade broad market sector, this AUM level is much larger.

In a comparison between AGG and BND, which bond ETF is better?

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AGG vs. BND: Background

AGG is a product of BlackRock Inc.’s well-known iShares ETF series.

It is three and a half years older than the other fund, having been launched in September 2003.

This well-known and well-marketed ETF has the support of the largest money manager globally.

The ETF’s daily operations were overseen by portfolio managers James Mauro and Karen Uyehara as of June 2023.

The Total Bond Market ETF is Vanguard’s top domestic bond offering.

One may consider the Vanguard fund to be the younger sister of the iShares fund.

Although there are some slight executional changes, the two ETFs track the same index and provide strong returns, minimal fees, and security.

KEY POINTS

  • Two bond exchange-traded funds that are often compared are Vanguard’s BND funds and iShares’ AGG funds.
  • Both products are exchange-traded funds (ETFs) that follow the Bloomberg U.S. Aggregate Bond Index and are passively managed as of November 30, 2023. Over the last decade, their average yearly returns have been around 1.34% and 1.35%, respectively.
  • The two funds perform similarly, although Vanguard’s BND has a far larger asset under management (AUM)—$302.4 billion as of November 30, 2023—than iShares’ AGG, which had $97.3 billion as of July 12, 2023.

 

AGG vs. BND: Methodology

Both products are passively managed ETFs.

The purpose of passive investing approaches is to minimize total fund expenditures, which lowers the cost of investments.

AGG was a lot more expensive and sluggish fund previous to the BlackRock purchase, but competition has greatly cut costs for both asset managers.

The Bloomberg U.S. Aggregate Bond Index, the main standard for domestic bond performance, is tracked by Vanguard’s BND in a float-adjusted manner.

This index is followed by both ETFs. The Bloomberg Aggregate Bond Index is a market value-weighted collection of all U.S. bond securities, except municipal bonds, Treasury inflation-protected securities (TIPS), and high-yield bonds.

BND vs. AGG Comparison: Measurable Data Features

As of November 30, 2023, the Vanguard Total Bond Market ETF has $302.4 billion in assets under management (AUM), much more than the iShares ETF, which had $97.3 billion as of November 7, 2023.

The average duration of the iShares ETF portfolio is around 6.3 years, which is a little longer than the average of 5.9 years. Both are fairly similar in terms of weighted average maturity and yield to maturity (YTM).

The two funds’ financial information is remarkably consistent. As of December 2023, the cost ratios for the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND) were both 0.03%.

These two bond ETFs are the most liquid, with hundreds of millions of dollars in trades per day.

AGG against BND: Crucial Dangers

Because they are bond-backed funds, the Vanguard Total Bond Market ETF and the iShares Core U.S. Aggregate Bond ETF are indirectly subject to counterparty risks in their underlying portfolios.

However, all risk profiles are rather similar. As of November 2023, AA-rated bonds accounted for 72.2% of the iShares Core U.S. Aggregate Bond ETF, while AAA-rated bonds made up 3.01%.

Conversely, 67% of the Vanguard Total Bond Market ETF was made up of government bonds.

Generally, neither bond owns any bonds with ratings below BBB.

For bond ETFs, inflation risk might be a greater concern.

It’s possible that ETFs containing a significant percentage of Treasury bonds will have yields that are at least as high as inflation.

Given that inflation peaked in 2022 at 9.1%, bond ETFs face the danger of losing investors’ buying power even while they are still profitable.

Compared to shorter-term securities, these ETFs are more susceptible to interest rate risk due to their intermediate duration.

Expert Opinion and Performance in BND vs. AGG

As of December 2023, iShares’ average annual return was 1.34%, but Vanguard’s was 1.35% for the previous 10 years. The Vanguard ETF most likely exhibited greater real performance by a very tiny margin since the iShares ETF has traditionally been the more expensive fund during that period.

Though seldom in agreement, almost all analysts have favorable judgments regarding both funds. Morningstar gives each of these ETFs three stars.

The Top Investing Individuals

There is no investment category that is more suited for the Vanguard Total Bond Market ETF or the iShares Core U.S. Aggregate Bond ETF due to the close similarities between their strategies, portfolios, benchmarks, performances, and expenses. In general, either fund may serve as a satellite for investors seeking exposure to high-grade domestic bonds or as a core holding for individuals concerned about retirement. They are not suitable for younger or more aggressive traders because to their low payouts and meager profits.

What Is the BND to AGG Expense Ratio?

Both BND and AGG have an expenditure ratio of 0.03%.

How Often Do BND and AGG Pay Dividends to Investors?

Dividends are typically paid by both BND and AGG on a regular basis. Since the dividends are paid out on the underlying bonds, which may have distinct or moving payment dates, the frequency might vary but is often monthly or quarterly.

Do Taxes Come Into Play When Investing in BND and AGG?

An important consideration for every ETF investment should be the tax implications.

Dividends from BND and AGG may be taxable, and you may also be subject to capital gains taxes when you sell your shares.

Either the short-term capital gains rate or the long-term capital gains rate may be applied to this tax.

The Bottom Line

Both the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND) are exchange-traded funds (ETFs) designed to provide investors with diversified exposure to the U.S. bond market.

Although these ETFs follow different indexes, they provide thorough coverage of a wide variety of bond types.

In general, BND and AGG operate similarly, are passively maintained, and often provide low cost ratios.

 

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