A Broader View On Bonds

When it comes to fixed income ETFs, the iShares Core U.S. Aggregate Bond ETF (AGG) is the largest by assets under management, standing at $91 billion. Often used as a tool to provide broad-based exposure to the bond market, AGG tracks the Bloomberg U.S. Aggregate Bond Index.

But in fact, there is another ETF that provides a more complete view of the bond market: the iShares Core Total USD Bond Market ETF (IUSB). IUSB is the only ETF to track the Bloomberg U.S. Universal Index.

And though both ETFs are negative in what is turning out to be a tumultuous year for fixed income, IUSB’s broader approach is slightly outperforming that of AGG.

Differences In Exposure

AGG tracks an index of U.S. investment-grade bonds, which includes Treasurys, agencies, CMBS, ABS and investment-grade corporates. In total, the ETF currently holds 9,848 securities.

IUSB, on the other hand, tracks an index of USD-denominated taxable bonds. Along with the investment-grade bonds that are found within AGG, the ETF also includes high yield, sovereign debt  and emerging market bonds that are USD-denominated.

This broader mandate means that IUSB holds 13,599 securities. By using our ETF Comparison Tool, we can see that IUSB also has a slightly different sector composition than that of AGG.

Courtesy of FactSet

Relative to AGG, IUSB has a lower allocation to Treasurys and MBS. The ETF also has tangibly higher weightings in industrial and financial sector bonds due to the inclusion of high yield bonds, which are heavily concentrated within these sectors.

High Yield Boosts Performance

Though less than 10% of IUSB is held within below-investment-grade securities, the high yield portion has been helping to drive the slight outperformance relative to the investment-grade AGG.

In spite of rising rates, high yield has been able to deliver positive returns this year as the strong economic environment has narrowed credit spreads over the course of the year. The iShares iBoxx USD High Yield Corporate Bond ETF (HYG) has gained 3.0% since the start of 2021.

As mentioned, IUSB is tilted heavily toward investment-grade areas of the market, which should help to mitigate the credit risk of the high yield and emerging market debt that is included within the portfolio.

But inclusion of such securities gives a slight bump to the yield. IUSB has a 30-day SEC yield of 1.73% versus 1.51% for AGG.

When it comes to interest rate risk, AGG and IUSB have similar durations. Duration is a measure of how sensitive bond prices are to changes in interest rates. Of the two ETFs, IUSB has slightly less interest rate risk, with an effective duration of 6.44 years.

AGG has an effective duration of 6.59 years. This means for every 1% rise in interest rates, AGG is expected to lose an additional 0.15% relative to IUSB. As rates have been trending up this year, this could also be a factor in IUSB’s slight outperformance year-to-date.

Other Differences

For this increase in diversification, IUSB charges a slightly higher fee. Its expense ratio is 0.06% versus AGG’s 0.04%. And in spite of AGG having nearly 6 times the assets of IUSB, both ETFs have tight spreads.

Courtesy of FactSet

Given that every basis point counts when it comes to fixed income, some might prefer to opt for the cheaper AGG. Others might be obligated by investment mandate to only hold investment-grade credit.

These factors, combined with AGG’s long track record due to having launched in 2003, might help to explain the ETF’s dominance when it comes to fixed income assets.

However, IUSB is a solid choice for those who want to take an incremental amount of credit risk and get exposure to a fuller view of the U.S.-denominated taxable bond market.

Contact Jessica Ferringer at [email protected] or follow her on Twitter