Bond exchange-traded funds (ETFs) are a useful device for modern fixed-income investors. These ETFs combine the relative stability and portfolio diversification of bond mutual funds, with the intra-day liquidity of stocks. The best bond ETFs top it off with a low cost. In terms of assets managed, the two kings of the bond ETF space are the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND).

The two funds held greater than $365 billion in total assets under management (AUM), as of August 2020. This level of AUM is greater than other bond ETFs and far outpaces the rest of the investment-grade broad market category. So when it comes to an AGG vs. BND review, which bond ETF is better?

BND vs. AGG: Background

AGG is a product of BlackRock Inc. and part of its successful iShares ETF series. It is the older of the two funds by three and one-half years, having launched in September 2003. Backed by all the resources of the world's largest money manager, this ETF doesn't lack for recognition or marketing. Portfolio managers James Mauro and Scott Radell are in charge of the ETF's day-to-day operations.

Meanwhile, the Total Bond Market ETF is Vanguard's preeminent domestic bond offering. In many ways, the Vanguard fund is a younger brother to the iShares fund. The two ETFs track the same index, albeit with slight variations in execution, and provide healthy competition for low fees, safety, and strong returns.

Key Takeaways

  • Two often-compared bond exchange-traded funds are iShares' AGG and Vanguard's BND funds.
  • Both funds are passively-managed ETFs that follow the Barclays U.S. Aggregate Bond Index, with similar average annual returns of about 3.7% over the past 10 years.
  • Although performance is virtually identical for the two funds, the Vanguard's BND is significantly larger, with $287.2 billion assets under management (AUM) compared iShares' AGG AUM of $78.9 billion.

BND vs. AGG: Strategy

Both funds are passively managed ETFs. Passive investment strategies are designed to reduce total fund costs, making them less expensive investments. Before the BlackRock buyout, AGG was a much more expensive and sluggish fund, but competition has driven costs down sharply for both asset managers.

Both ETFs track the Barclays U.S. Aggregate Bond Index, the leading yardstick for domestic bond performance, though Vanguard's BND follows a float-adjusted version of the index. The Barclays Aggregate Bond Index is a market value-weighted collection of the whole U.S. bond market, excluding municipal bonds, Treasury inflation-protected securities (TIPS), and high-yield bonds.

BND vs. AGG: Measurable Data Characteristics

The Vanguard Total Bond Market ETF has more than $287.2 billion assets under management, making it comparatively larger compared to the iShares ETF of $78.9 billion AUM. The portfolio for the iShares ETF has a slightly longer average duration, at 6.6 years relative to 5.86 years. Each is very similar in terms of weighted average maturity and yield to maturity (YTM).

The two funds show remarkably consistent financial figures. As of August 2020, the iShares Core U.S. Aggregate Bond ETF (AGG) had an expense ratio of 0.04% compared to 0.035% for the Vanguard Total Bond Market ETF. They are the two most liquid bond ETFs, moving hundreds of millions of dollars per day in daily trades.

BND vs. AGG: Fundamental Risks

As bond-backed funds, the iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF are indirectly exposed to counterparty risks in their underlying portfolios. The iShares ETF carries slightly less counterparty risk at first glance, owing to its better credit quality. Even though passive funds seem to operate on autopilot, each is also exposed to some management risks.

Perhaps a larger concern is inflation risk. Treasury-heavy bond ETFs rarely generate top market returns. Expect shareholders to struggle to offset an increase of 3 or 4% in the real cost of living over one year. Interest rate risk is also a problem since the intermediate-term nature of these ETFs makes them more susceptible than shorter-term instruments.

BND vs. AGG: Performance and Expert Opinion

The trailing five-year performances for the iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF are virtually identical. As of August 2020, iShares' had an average annual return of 3.73% over the past 10 years, compared to Vanguard's of 3.77%. The iShares ETF has tended to be the more expensive fund over that period, so the Vanguard ETF probably demonstrated stronger true performance by a very small margin.

Expert opinion is almost universally positive for both funds, though rarely overwhelming. Morningstar awards four stars to each of these ETFs.

Ideal Investors

Because the strategies, portfolios, benchmarks, performances, and costs of the iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF are so similar, there isn't an investor group more suited for one or the other. Generally speaking, either fund can fit as a core holding for retirement-conscious investors or as a satellite for those who want high-grade domestic bond exposure. Low yields and small returns make them ill-suited for younger or more aggressive traders.