AGG vs. BND: The Clash of 2 Outstanding US Total Bond Market ETFs

Bond exchange-traded funds (ETFs) are one of the ways to join bond investing and the fixed-income exposure that comes with it. Most modern-day investors prefer them because they allow you to invest in hundreds of bond issues at a go.  

Today, I will compare two of the most prominent bond ETFs out there. Suppose you have difficulty choosing between Vanguard’s BND and iShares AGG. In that case, I am confident this article’s in-depth insights and information will facilitate a quick and accurate decision.  

So, without wasting time, let’s get to it! 

Key Takeaways

  • Bond investing offers investors diversified and less risky exposure to fixed-income returns. 
  • Most fixed-income investors today leverage bond ETFs as investment vehicles to access bond investing. 
  • Bond ETFs invest exclusively in bonds. They are more stable and diversified than bond mutual funds and cost less to buy and maintain.
  • Vanguard’s BND and iShares AGG are two major bond market ETFs in the current market. 
  • Both ETFs track the same index – the U.S. Aggregate Bond Index, although BND’s index is slightly float-adjusted. 
  • Both funds are identical in terms of historical performance, offering investors decent returns over their investment in recent years. 
  • Choosing between both ETFs will boil down to an investor’s personal preferences, considering there is nothing drastic to separate them. 

AGG vs. BND: Background

Bond investments and assets are vital components of any well-rounded portfolio. While investing in bonds is not as appealing as stocks in terms of returns, this asset class adds balance and minimizes your risk and volatility levels.  Bond ETFs are known for their relative stability and rich diversification – features common to bond mutual funds. In addition, they have the intra-day liquidity usually associated with stocks.  

Here is an outlook of our two bond ETFs of interest:

AGG vs. BND:
AGG vs. BND:

Vanguard Total Bond Market ETF (BND)

The Vanguard Total Bond Market ETF (BND) is the most popular bond ETF from the stables of Vanguard. Vanguard describes the fund as providing “broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds.”  

There are about 9,500 holdings in BND’s portfolio, with a significant percentage of the portfolio allocated to bonds with a maturity of 20-30 years. If you are an investor looking to play the long- or medium-term game, bond investing through BND is a good play. Its relatively high potential for investment income offers investors a reliable income stream and healthy diversification over time.  

BND was launched in April 2007 and is available to investors directly from Vanguard or other reputable brokers. 

iShares Core U.S. Aggregate Bond ETF (AGG)

Launched in September 2003, the iShares Core U.S. Aggregate Bond ETF (AGG) has steadily developed into one of the largest exchange-traded bond funds in the current market. AGG currently invests in over 10,000 individual bond holdings and allocates about 40% of its portfolio to U.S. Treasury bonds.  

According to iShares, AGG is designed to provide investors with a “low-cost, easy way to diversify a portfolio using fixed income.” Consequently, the ETF offers investors exposure to domestic fixed-income markets in the seamless way possible through U.S. investment-grade bonds.  

AGG is cheap and easily accessible from iShares and other top brokers in the market. 

AGG vs. BND: Investment Strategy and Composition

The overall goal of both AGG and BND is to offer investors exposure to the U.S. bond market. However, they do this following a different methodology. Let’s start with their underlying indices. 

Underlying Indices

The iShares Core U.S. Aggregate Bond ETF (AGG) seeks to track the Bloomberg Barclays US Aggregate Bond Index, the leading metric for domestic bond performance. This index measures the performance of the entire U.S. investment grade (as determined by Bloomberg Index Services Limited). The index currently comprises over 12,000 bond issues, including investment-grade U.S. Treasury bonds, government-related bonds, corporate bonds, mortgage-backed pass-through securities, commercial mortgage-backed securities, and asset-backed securities that are publicly offered for sale in the United States. All of these securities have at least one year remaining to maturity. Investors keen on exposing their portfolio to investment-grade bonds will find AGG an excellent choice.  

The Vanguard Total Bond Market ETF (BND) seeks to track the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. This index is designed to measure the performance of a broad spectrum of U.S. public, investment-grade, taxable, fixed-income securities—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities. All of these securities have maturities of more than a year.  It is particularly suitable for medium- to long-term investors seeking a reliable source of income and some considerable diversification to their stock-related risks.  

Portfolio Composition, Exposure, and Holdings

AGG’s portfolio comprises over 7,000 bonds spread across five broad fixed-income sectors. This diversification ensures investors can adequately access the U.S. investment grade bond market. About 70% of this portfolio goes into high-quality, government-backed securities, including U.S. Treasuries and agency mortgage-backed securities (MBS). The other 30% is spread across corporate bonds, non-corporate credit, and municipal securities.  

AGG’s sector breakdown can be summarized as follows:

  • Treasuries – 39.8% 
  • Securitized – 29.7% 
  • Corporates – 26% 
  • Government Related – 4.1% 
  • Cash Securities – 0.4%

The weighted average maturity of the bonds in AGG’s portfolio is 8.77 years, with more than half of the portfolio expected to mature between two and ten years. The fund’s total net assets are over $82 billion.  

On the other hand, BND has over 10,000 bonds in its portfolio; all spread across multiple sectors. Treasury/Agency bonds account for the largest sector of the portfolio–45.90%, followed by Government Mortgage-Backed bonds–20.20%.  Other major sectors covered include Industrial (15.70%), Finance (8.80%), and Foreign (3.70%).  

We can summarize the sector breakdown as follows:

  • Treasury/Agency – 45.90%
  • Government Mortgage-Backed – 20.20%
  • Industrial – 15.70%
  • Finance – 8.80%
  • Asset-Backed – 0.40%
  • Foreign – 3.70%
  • Commercial Mortgage-Backed – 2.20%
  • Utilities – 2.20%
  • Other – 0.90%

These bonds’ average effective maturity duration is 8.9 years, while the average duration is 6.7 years. The fund’s total net assets are $281.6 billion. Therefore, it is bigger than AGG in terms of net assets and the number of holdings.  

AGG vs. BND: Performance and Returns

Historical performance is one of the most vital indicators of what investors can expect regarding returns from any mutual fund. Therefore, comparing how these two bond ETFs have performed over time is essential.  

Both AGG and BND are good performers overall. They have rewarded investors’ faith with decent rewards according to what is expected of any solid fixed income investment option. However, BND edges AGG slightly in the bigger picture.   

AGG vs. BND: Performance Summary, Source:
AGG vs. BND: Performance Summary, Source:

Annual Total Returns

AGG’s average annual return since inception is 3.21% – slightly below the benchmark’s 3.34%.  The five- and ten-year performances have been decent as well. AGG has returned 1.49% in the last ten years, 0.83% in the previous five, and -0.97% in the last three.  The benchmark is not far away– 1.54% in the previous ten, 0.88% in the last five, and -0.93% in the last three years. The previous year has been rough for most bond funds, and AGG is no exception. The fund returned -10.29% in the previous year –the same as its benchmark. However, experts expect this not to be a problem, considering most investors are in the play for the long term.  

The annual total returns of the Vanguard Total Bond Market Index ETF (BND) over the last ten years have been impressive, with negative returns recorded in only three years–2013, 2018, and 2021. BND has returned 3.59% and 2.85% in the previous five and ten years, respectively, before taxes.  In comparison, the underlying index – the Bloomberg U.S. Aggregate Float Adjusted Index, returned 3.64% and 2.94% in the last five and ten years, respectively. Interestingly, BND has struggled in the past year but so has its benchmark– -10.45% and -10.46%, respectively. This should not be a problem, considering the fund is designed for medium- and long-term investment goals.  

Capital Growth

If you had invested $10,000 into both BND and AGG in January 2010, you would have marked significant growth of your capitals in both cases. For instance, BND has returned 37.49% within that period, which means your money would be currently worth $13,749. AGG is not far behind – the fund would have shown $38.12% growth over the same period, which means your portfolio would be worth $13,812. In terms of dividend yield, BND has a slight upper hand with a 2.24% current dividend yield, compared to AGG’s 1.95$. 

AGG vs. BND: Fees and Taxes

Bond ETFs are known for their affordable rates and cheap fees– one of the reasons investors prefer them to other forms of bond index or mutual funds. AGG and BND are not exceptions.  

BND has a market price of about $77, with 0.02% management fees and 0.01% going into other expenses.   Therefore, the total annual fund operating expenses, also called the Expense Ratio of the fund, is 0.03%.  

Like BND, AGG’s management fee is 0.03%. While it has no foreign taxes, there are 0.01% acquired fund fees and expenses. However, the issuer offers a 0.01% fee waiver, which brings the net expense ratio to 0.03%. The current market price is about $103.  

Summarily, both funds’ expense ratio is 0.03%, and there are no hidden taxes or additional fees. 

AGG vs. BND: ESG Ratings and Impact

There is little or no information on the ESG ratings of AGG. However, BND’s ESG score is 6.69 (over 10), while the ESG Score Peer Percentile is 38.4%.   

NB: The ESG ratings are designed to assess the resilience of ETFs to long-term risks and opportunities associated with Environment, Social, and Governance (ESG) issues. 

AGG vs. BND: Risk and Volatility

AGG vs. BND: Drawdowns, Source:
AGG vs. BND: Drawdowns, Source:

Before we round up, let’s look at these funds’ risk and volatility levels. PorfoliosLab puts AGG’s volatility at 7.12% and BND at 6.99%. The numbers are close, but AGG is the more volatile with a slight margin.  

Regarding risk, both funds are indirectly exposed to counterparty risks that come with their underlying indices. But a more significant risk of more considerable concern is the inflation risk. Records have shown that bond ETFs with large allocations in treasury hardly generate high market returns. BND and AGG also fall into this category.  

It is also important to mention the interest rate risk. This can be an issue due to the medium-term nature of these ETFs, which puts them at a higher risk than their short-term counterparts.  

Final Verdict

BND and AGG are passively managed bond ETFs representing the total market and other parts like investment-grade bonds. Like other bond ETFs, their most significant selling points are their high liquidity, rich diversification, and minimal costs. Unlike bond mutual funds, they trade during the day like normal securities, giving investors access to real-time pricing at any time of the day. They are also easier to manage and more accessible. Oh, their tax efficiency is also impressive. 

Which of the two bond mutual funds offer better exposure to U.S. investment-grade bonds?  

BND vs. AGG has been an interesting comparison. Both have similar investment strategies, portfolios, benchmarks, costs, and performances. Therefore, it is difficult to say one is better suited for a specific type of investor than the other. 

Investors interested in consistent returns over a long period will find both excellent additions to their portfolio. You may want to consider other index funds options if you are a younger or more aggressive investor. The low yields and small returns from these two ETFs will likely not reflect your investment goals. 

Overall, whichever of the funds you decide to go for, you can rest assured of making the right decision.  As always, it is important to mention that none of the information on this page should be taken as investment advice. 

I recommend you consult a professional investment adviser where and when you need to make crucial investment decisions.

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