AGG vs BND: Similarities, Differences and Which ETF to Trade

Bond is a debt security that represents a loan made by an investor to a borrower, which is typically private company or government body.  

When traders buy a bond, they are essentially loaning money to the issuers. In return, the issuer promises to pay a specific interest rate during the bond’s duration and repay the principal at the end of the tenure ^[1]. For example, a $1000 bond with a 10-year maturity date and a coupon rate of 5% per annum would pay $50 a year for a decade, after which the principal value will be repaid in full back to the trader. 

The iShares Core US Aggregate Bond exchange-traded funds (AGG ETF) and the Vanguard Total Bond Market exchange-traded funds (BND ETF) are bond ETFs that track an index that comprises the total US investment-grade bond market. This article will dive deeper into the two ETFs, with discussion on their similarities and differences. 

Key Points

• Both AGG and BND ETFs are passively managed funds that aim to replicate the performance of U.S. investment-grade bond indexes, with identical expense ratios of 0.03%.
• AGG, managed by BlackRock, tracks the Bloomberg U.S. Aggregate Bond Index and allocates a higher percentage to AAA-rated bonds, while BND, managed by Vanguard, follows the Bloomberg U.S. Aggregate Float-Adjusted Index, with a larger asset base and longer average maturity.
• Despite BND’s larger asset size and longer average duration, both ETFs have shown almost identical historical performance returns over the past decade.

What is a Bond ETF 

A bond ETF is a type of ETF that exclusively invests in bonds only.  

Typically, bond ETFs are passively managed as they are used to track a specific index on the stock exchanges. In comparison to mutual funds, traders are able to trade the bond ETFs throughout the market trading hours. This is one of the reasons bond ETFs offer more liquidity in comparison to mutual funds. 

Read this article on mutual funds vs ETFs. 

What is the AGG ETF 

The iShares Core US Aggregate Bond (AGG) ETF is a product issued by BlackRock on the NYSE and aims to track the Bloomberg US Aggregate Bond Index. Many traders may think the AGG represents the total US bond market. However, the index only tracks the investment grade portion of the bond market. The fund holds over 10,420 US investment-grade bonds with a weighted average maturity of roughly 8.65 years and an average duration of approximately 6.39 years ^[2].  

About 73.22% of the fund is allocated to AAA-rated credit quality bonds, the highest possible rating that any major credit rating agency may assign to an issuer’s bonds ^[3]. These bonds have a high degree of creditworthiness as their issuers are able to meet the financial commitments quickly and have a lower risk default setting.  

The data for the weighted average maturity, average duration and credit rating holdings allocations are of 31 August 2022 ^[4]. 

The bonds in the ETF are further separated into different sectors. Here is the top five sector breakdown with their weightage. 

Sector Breakdown	Weightage (%)
Treasury	41.39
Mortgage-Backed Securities Pass-Through	27.53
Industrial	14.45
Financial Institutions	8.17
Utility	2.09

The data for the table above is referenced from the BlackRock website ^[5].   

The data above are the sector breakdown weightage of the ETF as of 29 September 2022. 

What is the BND ETF 

The Vanguard Total Bond Market (BND) ETF is a product issued by The Vanguard Group on the NYSE. It seeks to track the Bloomberg US Aggregate Float Adjusted Index.  

The float-adjusted index refers to the amount of a given security that is available for public trading and excludes amounts held by company insiders, affiliates or governments ^[6]. Non-float-adjusted benchmarks will include these securities, even though they represent a part of the market that is not available to portfolio managers and other investors.  

This ETF holds 10,178 US investment-grade bonds with a weighted average maturity of 8.9 years and an average duration of 6.7 years. About 67% of this fund is allocated to the US Government, which includes products in the US Treasury, US Agency, and US Agency Mortgage-Backed Securities. The second highest holdings are in BBB-rated credit quality bonds, with about 14.27% allocated.  

The data for the weighted average maturity, average duration and credit rating holdings allocations are of 31 August 2022 ^[7]. 

The bonds in the ETF are further separated into different sectors. Here is the top five sector breakdown with their weightage. 

Sector Breakdown	Weightage (%)
Treasuries	46.00
Government Mortgage-Backed	20.20
Industrial	15.70
Financial Institutions	8.80
Foreign	3.70

The data for the table above is referenced from the Vanguard website ^[8].   

The data above are the sector breakdown weightage of the ETF as of 31 August 2022. 

How the AGG ETF and BND ETF work 

AGG ETF 

The AGG ETF is managed by BlackRock Fund Advisors (BFA), who serves as the ETF’s investment adviser. The BFA uses an indexing approach to achieve the fund’s investment objective. The advisor does not try to beat the index it tracks and does not seek temporary defensive positions when markets decline or appear overvalued. This indexing method may eliminate the chance that the fund will substantially outperform the underlying index (Bloomberg US Aggregate Bond Index) that is being tracked, but it also reduces some of the risks of active management, such as poor security selection ^[9]. 

BND ETF 

The Vanguard fund manager manages the BND ETF, and they serve as the investment advisor for the ETF. The fund manager uses a passive investment approach that is designed to track the performance of the Bloomberg US Aggregate Float-Adjusted Index. The fund’s passive investment approach will use a sampling technique to match key benchmark characteristics such as duration, cash flow, and quality. This optimised sampling is designed to avoid the expense and impracticality of fully replicating the index ^[10]. 

AGG vs BND ETF: A Comparison  

	AGG ETF	BND ETF
Fund Inception	2009	2007
ETF Provider	Offered by Blackrock	Offered by Vanguard
Index Tracked	Bloomberg US Aggregate Bond Index	Bloomberg US Aggregate Float-Adjusted Index
Fund Investment Strategy	Passively managed, seeks to track the Index	Passively managed, seeks to track the Index
Net Assets	$82.23B	$283.8B
Dividend Yield	2.02%	2.23%
Expense Ratio	0.03%	0.03%
Weighted Average Maturity	8.65 years	8.9 years
Average duration	6.39 years	6.7 years
Number of bonds held	10,420	10,178

The data for the table above is referenced from the iShares by BlackRock and Vanguard Group website. ^[11,12]. The data above are as of 6 October 2022. 

AGG vs BND ETF Performance 

Vanguard’s BND and Blackrock’s AGG have had almost identical performance returns over the last 10 years based on the historical performance data of both ETF.  

	AGG ETF (%)	BND ETF (%)
1 Month	– 3.03	-2.97
3 Months	-4.30	-4.23
1 Year	-13.78	-13.93
3 Years	-3.17	-3.18
5 Years	-0.01	0.00
10 Years	0.96	0.96

The data for the table above is referenced from the Yahoo Finance Website ^[13,14]. The data above are as of 6 October 2022. 

Similarities between AGG and BND ETF 

Management style 

Both AGG and BND ETF are passively managed as the fund managers will seek to replicate the performance of the index. Both passive ETFs provide traders with greater flexibility to execute a buy and hold strategy in comparison to an actively managed ETF. 

Expense Ratio 

Based on the data above, it can be seen both funds have an expense ratio of just 0.03%. This expense ratio will be used to help pay for the portfolio management, administration, marketing, and distribution. Having a low expense ratio will lower the cost a trader needs to pay for the fund, and this applies yearly.

Differences Between AGG and BND ETF 

BND vs AGG: Measurable Data 

The BND ETF has more than $283.8 billion in assets under management, which is larger than the AGG ETF, with $82.23 billion under management. 

However, the BND ETF has a slightly longer weighted average maturity date. The average effective maturity is the average length of time until fixed-income securities held by a fund reach maturity and are repaid. The longer the average maturity, the more the ETF’s share price will move up or down in response to the changes in interest rate set. 

In addition to that, the average duration for the BND ETF is also slightly higher. The average duration measures the sensitivity of bond prices to interest rate movements. For example, if a bond has an average duration of three years, its price will fall about 3% when the interest rate is raised by one percentage point. However, when the interest rate falls by one percentage point, the bond price rises by about 3 ^[15]. 

The BND ETF tracks the performance of the Bloomberg US Aggregate Float-Adjusted Index while the AGG ETF tracks the performance of the Bloomberg US Aggregate Bond Index. The BND ETF will be a more accurate reflection of the market movements and stocks that is actively available for trading in the market ^[16]. 

The float adjusted index is usually thought to provide a more accurate reflection of the market capitalisation of the index. This is because the float adjusted index will only take into consideration the price of the equity and multiply it by the number of shares that is readily available to trade in the market. Due to this, the market capitalisation of the index that is not float adjusted will always be higher as it would consider all the active and inactive shares in the market. 

Conclusion 

Based on the past ten years of AGG and BND ETF performance, they have provided similar returns to traders ^[17]. In addition, the strategies, portfolios, benchmarks, and costs for both ETFs are so similar that it is difficult to say which is better suited for traders. Both are worth the consideration for those who are interested in trading bond ETFs.  

Start trading bond ETFs through CFDs today by opening a live account with Vantage. Vantage offers both AGG and BND ETFs through CFDs. 

Reference