Total Bond Market ETFs
May 23rd 2012 at 8:00am by Tom Lydon
Investors looking for a diversified bond fund can buy total-market ETFs that charge low fees with one click of the mouse.
Bond investors may start from scratch and gather various bond securities and assets to form a customized bond investment portfolio. However, for many, this approach is very time consuming and may require a lot of hands-on monitoring. ETF investors, though, may opt to take on a broad total bond market ETF to gain a diversified exposure. [Treasury ETF Rally Threatens Stocks]
The Barclays Capital U.S. Aggregate Bond Index is a widely used proxy for the U.S. investment-grade bond market. Here, we will compare four ETFs that utilize this Index as a benchmark:
The iShares Barclays Aggregate ETF (NYSEArca: AGG). Top bond allocations include Treasuries 35.7%, mortgage-backed securities pass-throughs 29.4%, and corporate industrials 11.3%. AGG has an 30-day SEC yield of 1.86%, 1485 total holdings and an expense ratio of 0.22%. The fund has an effective duration of 4.46 years.
“Investors worried about rising interest rates should note that the fund’s average effective duration (a measure of interest-rate sensitivity) usually floats between 4.0 and 5.0 years, meaning that a 1-percentage-point rise in rates will reduce AGG’s price between 4% and 5%,” according to Morningstar analyst Timothy Strauts.
The SPDR Barclays Capital Aggregate Bond ETF (NYSEArca: LAG). Top bond allocations include Treasury 36.0%, mortgage backed securities 29.5% and corporate industrials 11.3%. The fund is pretty much similar to the iShares product, except that that it has an expense ratio of 0.1745%, 826 holdings and a 30-day SEC yield of 1.37%. The fund has a duration of 5.0 years.
The Vanguard Total Bond Market ETF (NYSEArca: BND). Top allocations include Treasury 43.1%, mortgage backed securities 27.2% and industrials 11.8%. BND has an expense ratio of 0.1%, 5215 holdings and a 2.0% 30-day SEC yield. The ETF has a duration of 5.2 years.
The Schwab U.S. Aggregate Bond ETF (NYSEArca: SCHZ). Top allocations include 36.0%, mortgage pass-through and U.S. corporate 20%. SCHZ has an expense ratio of 0.1%, 665 holdings and a 30-day SEC yield of 1.78%. The fund has a duration of 4.38 years.
Since the funds all follow the same Index, fund holdings and allocations will show similarities. However, investors may notice that on a cost basis, BND and SCHZ have the lowest expense ratio at 0.1%. Still, BND may offer the more diversified approach at 5215 holdings.
For more information on the bond market, visit our bond ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.