Investors looking for a diversified bond fund can buy total bond 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.
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.
1. The iShares Barclays Aggregate ETF (AGG). Top bond allocations include Treasuries (35.7%), mortgage-backed securities pass-throughs (29.4%), and corporate industrials (11.3%). AGG has a 30-day SEC yield of 1.86%, 1,485 total holdings, and an expense ratio of 0.22%. The fund has an effective duration of 4.46 years.
According to Morningstar analyst Timothy Strauts, "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%."
2. The SPDR Barclays Capital Aggregate Bond ETF (LAG). Top bond allocations include Treasuries (36.0%), mortgage-backed securities (29.5%), and corporate industrials (11.3%). The fund is pretty similar to AGG, except 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.
3. The Vanguard Total Bond Market ETF (BND). Top allocations include Treasuries (43.1%), mortgage-backed securities (27.2%), and industrials (11.8%). BND has an expense ratio of 0.1%, 5,215 holdings, and a 2.0% 30-day SEC yield. The ETF has a duration of 5.2 years.
4. The Schwab U.S. Aggregate Bond ETF (SCHZ). Top allocations include Treasuries (36.0%), mortgage pass-throughs 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 5,215 holdings.
Max Chen contributed to this article.