Fixed Income: U.S. - Broad Market Investment Grade
The US Investment Grade Broad Market Bond segment is home to two of the largest and most liquid funds around—AGG and BND—and the segment itself is one of the most popular fixed
“core building blocks for fixed income exposure” income segments. The segment has been deemed the core bond allocation which means many investors use ETFs in this segment as the core building blocks for their fixed income exposure. Funds in this segment provide market-value weighted exposure to Treasurys, MBS and credits.
Before the introduction of two rate-hedged strategies by WisdomTree, it was a rather boring segment with four large funds tracking essentially the same index, the Barclays Capital U.S. Aggregate Bond Index. All four vanilla funds in the segment cost less than 12 bps for a round-trip trade, so there is plenty of liquidity for retail investors with AGG and BND being the clear choices for active traders.
AGZD and AGND are the two new entrants of the segment. They offer different takes on the core bond market by tracking the same long Barclays index with interest rate hedge overlays. AGZD tries to mitigate interest rate risk with a net 0 duration target while AGND exposure investors to interest rate risk in the opposition direction with a net duration of -5 years.
Overall, AGG has demonstrated the most consistently tight tracking, competitive fees, ample liquidity, and comprehensive market-like exposure, earning it our Analyst Pick of the segment. (Insight updated 12/13/17)
All Funds (15)
AGG $52.53 B 52528375800 Most Liquid
BND $37.02 B 37023718197.18 Efficient & liquid
AGND $25.94 M 25942320 Carry significant duration risk
AGZD $24.09 M 24088850 Mitigate interest rate risk
BNDC $8.75 M 8745299.9865 N/A
AGGY $242.86 M 242860320 aggregate US
AGGE $66.59 M 66592419.586 N/A
SPAB $1.35 B 1349774355.6687 Efficient
SCHZ $4.93 B 4925728346 Very low expense ratio
HQBD $20.19 M 20187280 N/A
PBND $24.94 M 24944024.944 N/A
NUBD $42.4 M 42399530 N/A
NUAG $66.16 M 66162960 N/A
BNDS $1.1 B 1095180889.5723 Efficient
LAG $1.07 B 1069868503.2 Efficient
ETF.com Grade as 12/07/17
Fixed Income: U.S. - Broad Market Investment Grade
ETF.com Efficiency Insight
Since all four vanilla funds in the segment track essentially the same index (the Barclays US Aggregate Index) fees and tracking performance are of paramount importance. Exception for LAG,
“All four vanilla funds are well-managed” which charges 16.45 bps, the rest of vanilla funds charge less than 10 bps. Of the four, AGG edges out the competition by delivering consistently tight tracking: The fund has median tracking that is in line with its expense ratio with minimal volatility.
All four vanilla funds are well-managed, and each has enough assets to make closure unlikely. They all deliver the index very well. Structurally, our only small gripe is with BND, which reports holdings monthly with a lag, while the other three funds in the segment publish holdings daily. However, the fund’s solid tracking should alleviate investor’s concerns about what the fund holds on a daily basis.
AGZD and AGND are the two newest entrants of the segment. Both funds charge north of 20 bps, higher than vanilla funds. However, the fees seem reasonable in the context that they track two rate-hedged versions of the Barclays Agg index. So far, both funds struggle in tracking their underlying indexes, likely due to high degrees of portfolio optimization. AGZD’s growing asset base is enough to clear from closure risk. However, AGND continues to carry medium closure risk on the back of small asset base and thin trading volumes. (Insight updated 12/13/17)
ETF.com Tradability Insight
Active traders will find AGG’s and BND’s vastly superior liquidity to their liking, as the two funds combine to attract over 90% of segment volume with extremely tight spreads.
“Active traders will find AGG and BND vastly superior” Institutional liquidities are also exemplary.
Retail investors can look beyond AGG and BND as LAG and SCHZ both get more than $1M in volume on most days, ample volume for retail investors. Of the two, SCHZ is a bit more institutional friendly with slightly lower creation fees per unit. Large orders in both will likely require some effort to execute with the help of liquidity providers but otherwise should be fair.
As the markets for AGZD and AGND continue to develop, trade them with care. They have been trading at double-digit wide spreads on thin volumes. Retail investors should use limit orders while institutions should work with issuer’s capital market desk and liquidity providers for the best execution. (Insight updated 12/13/17)
ETF.com Fit Insight
Funds in the US broad investment-grade (Agg) segment can be largely divided into two groups: Vanilla and duration-hedged.
The four vanilla funds in the segment track essentially the
“AGZD and AGND turn the conventional core bond thinking on its head” same index–Barclays US Aggregate Bond Index. (BND tracks a float-adjusted version of the index) There doesn’t seem to be material differences between the four funds. All four vanilla funds deliver market-like exposure in our view.
SCHZ has one of the highest Fit score. It delivers an almost identical exposure as our benchmark in all portfolio characteristics despite small and immaterial sector and maturity composition.
Tied with SCHZ, LAG also has one of the highest Fit scores. It delivers a market-like exposure. It takes the least amount of sector bet. Its sector breakdown is almost identical to our benchmark, with less than 1% deviation across all sectors.
Similar to SCHZ, AGG shares the same index as our benchmark. It also does a stellar job in delivering marketlike exposure, with a much smaller portfolio than BND. While without any meaningful sector bets, the portfolio has a slightly shorter maturity and duration than our benchmark, thanks to a significant cash position for real life portfolio management.
BND holds the broadest portfolio in the segment, with over 5K holdings (which adds up to about 16K once you unbundle the MBS in the portfolio into individual bonds), and a strong Fit score, to boot. BND’s underweighting in MBS and large cash position are likely due to unsettled MBS TBAs and offsetting cash collaterals.
WisdomTree introduced AGZD and AGND and effectively spiced up the previously boring US broad market investment grade segment. AGZD and AGND turn the conventional core bond thinking on its head. These two funds track the same parent long index with rate-hedged overlays. AGZD aims for net effective duration of 0 years while AGND aims for net effective duration of -5 years. The hedging strategies effectively decouple the performance of two funds from the broad bond market movement.
AGZD, aiming for net duration of 0 years, aims to achieve a “rate-neutral” core bond portfolio that captures the credit spread. It is a suitable pick for investors who are uncertain about the interest rate path. On the other hand, AGZD aims for net duration of -5 years which actually exposes investors to substantial interest rate risk, just not in a typical fashion. It is a pick only for those who strongly believe in an upward interest rate path. AGZD and AGND can also be useful tools to precisely shorten the duration of a larger fixed income allocation. Caution: A non-parallel shift in the yield curve can make precise hedging very difficult.
Overall, the four vanilla funds are solid choices for broad exposure to the investment grade US investment grade market. While AGZD and AGND deliver similar long exposures, they offer vastly different return profiles than the core bond market as a result of their rate-hedging overlays (Insight updated 12/13/17)