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.