The "AGG" ETF is Still a Great Option for Core Bond Exposure

Since 2003, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) has been the go-to fund for investors who want that core bond exposure, and with close to 20 years under its belt (not to mention $67 billion in assets under management), AGG is still a great option.

“Of the 750-plus fixed-income exchange-traded funds on the menu, iShares Core U.S. Aggregate Bond ETF is the largest,” wrote  in Morningstar. “It is also one of the oldest fixed-income ETFs, having launched in September 2003. Long the barometer for U.S. investment-grade bonds, AGG’s benchmark–the Bloomberg Barclays U.S. Aggregate Bond Index–has changed drastically in the years since the financial crisis. Prior to 2008, Treasury bonds made up approximately 20% of the index. Following a surge in government bond issuance, that number currently now sits at 40%.”

Fund facts:

  • AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
  • The index measures the performance of the total U.S. investment-grade bond market.
  • The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Reasons to use AGG:

  • Broad exposure to U.S. investment-grade bonds
  • A low-cost easy way to diversify a portfolio using fixed income
  •  Use at the core of your portfolio to seek stability and pursue income

With Treasury yields near lows thanks to the central bank cutting interest rates this year, AGG might not be the best option for yield-started investors. However, for those looking for overall bond exposure–say, for a 60-40 capital allocation strategy, using an ETF like AGG would help especially given the amount of investment-grade debt issues it holds.

“This is a conservative portfolio with minimal credit risk, which can make it a low hurdle for active managers,” noted. “That does not make this an unattractive proposition, as risk and return are highly correlated in the fixed-income market. More than 70% of the assets in this portfolio carry a AAA rating, making it one of the more conservative options in the category. After controlling for risk, this portfolio is tougher to beat. Like most investment-grated portfolios, interest-rate risk is the biggest driver of returns here. Its average effective duration is about 5.5 years, as of this writing, while the category average is about 4.75 years.”

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