AGG vs. BND Bond ETFs: Which One is Better?

AGG and BND are often mentioned in the same breath as Bond ETFs that give broad bond market exposure.  If you are looking for a core bond fund for your portfolio then both funds are worth a look.  However there are a few differences worth looking at which we have outlined below.

Issuer iShares Vanguard
Fund Objective Track the total US Investment Grade Bond Market Track the performance of a broad,
market-weighted bond index.
Index Tracked Barclays Capital US Aggregate Bond Index Barclays Capital U.S. Aggregate Float Adjusted Index
Duration 4.52 years 5.1 years
Tracking Error .19% .20%
Expense Ratio .20% .10%
Total Assets $15.6 Billion $110.9 Billion
Average Daily Volume 962,070 1.2 Million
Morningstar Rating 3 Stars 3 Stars

Learn More about:  Bond ETFs

Now that we have a clear side by side comparison let’s go through each row of the above table.

Issuer: Both iShares and Vanguard are well respected firms with lots of experience.

Fund Objective: While there is a difference in verbiage, the fund objective is basically the same for both funds.

Index Tracked: This actually came as a surprise to us as we would have thought that both ETFs would have tracked the Float Adjusted Index.  The government’s debt issuance and Federal Reserve purchases of that debt have increased so dramatically since the financial crisis, that the Float Adjusted index (which excludes debt held by the Fed)  is seen by many to be a better representation of the investment grade bond market as a whole.  You can read more about this in our article on bond indexes.

Duration:  There was also a pretty significant difference in duration between the two funds when this report was written.  If this persists into the future then you will likely see slightly larger gains in the BND ETF if interest rates continue lower and slightly larger losses if interest rates rise.  You can learn more about this in our article on bond duration.

Tracking Error: Tracking error is a measure of how closely the ETF tracks its stated benchmark.  This is pretty much a toss up with both funds having a very low tracking error.

Expense ratio: The expense ratio is the yearly charge by the ETF company in order to cover the expenses of managing the ETFs.  Both the AGG and the BND have very low expense ratios.  However the BND ETF’s expense ratio is half as much as the AGG.  This can make a difference especially in the low interest rate environment we are in and is a large advantage for the BND over the AGG.  If you are not familiar with expense ratios read our article on bond ETF fees.

Total Assets:  Both are very large ETFs with plenty of assets under management to be broadly diversified.

Average Daily Volume: This is the number of shares that the ETF trades on average per day.  Looking at volume is important because it is a sign of how liquid the ETF is and how low the difference between the price where you can sell the ETF and the price where you can buy the ETF will be.  This is called the spread and the narrower the spread is the less costly the ETF is to trade.  At right around 1 Million shares a day, both are very liquid.

Morningstar Rating: Morningstar is the most well respected rater of mutual funds and has extended its rating system to cover ETFs as well.  They have a 5 star system so by that measure both are considered fairly average.  You can read more about the Morningstar rating system here.

Below is the performance chart of the two ETFs over the last 5 and a half years.  As you can see the performance tracks pretty closely. most of the time.  However, during the financial crisis there was a wide divergence in performance.  During the week of September 10th 2008 when Lehman Brothers went bankrupt and the markets were in chaos the AGG  lost significantly more than the BND.  That week the BND was down 6.72% and the AGG was down much further at  11.53%.

BND vs. AGG Chart

The BND ETF has always been super diversified, holding thousands of bonds in its portfolio.  During 2008 the AGG used a much smaller sample to track the index of only a few hundred bonds.  Because its positions were more concentrated during the financial crisis the AGG ETF lost substantially more.  While the AGG has since diversified its holdings further it seems that Vanguard’s experience came in handy during the financial crisis.  This combined with the fact that the BND has half the expense ratio of the AGG makes it our choice in the AGG vs. BND Faceoff.

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