ETF Of The Week: AGG Turns 15

The first ETF to offer broad coverage of the bond market is turning 15, and it’s worth looking back on the changes it sparked in the ETF industry.

It wasn’t the first bond ETF—that was a family of funds covering different segments of the bond market that iShares rolled out in July 2002. Today all of those are multibillion-dollar products, the largest being the $34 billion iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD). The iShares Core U.S. Aggregate Bond ETF (AGG) didn’t come along until more than a year later, in late September 2003. But it was the first bond ETF to give investors exposure to the world’s premier bond index, the Barclays U.S. Aggregate Bond Index.

Today AGG is a $56 billion ETF that charges 0.05% in expense ratio, a fraction of its original price tag of 0.22%, which, in all fairness, was considered a bargain basement price in 2003. Not only is AGG the 10^th-largest U.S.-listed ETF today, it is the largest bond ETF in the world.

The fund covers U.S. investment-grade bonds, with holdings that number nearly 7,000.

Game-Changer

iShares Fixed Income Product Strategist Karen Schenone said in a recent blog that AGG “revolutionized and democratizes bond investing,” and it’s hard to disagree. It offered investors exposure to the entire investment-grade U.S. bond market, and it did so in a structure that could trade throughout the day, unlike a traditional mutual fund.

It also, as Schenone notes, bypassed the over-the-counter market where investors would trade individual bonds, and the OTC bond market is notoriously massive and illiquid. Further with mutual funds, investors could only trade at the end of each day. AGG brought investors total market transparency and intraday liquidity.

Today it’s a favorite tool of both institutional and retail investors. That translates into deep liquidity, with an average of $323 million, or 3.5 million shares, traded daily, and an average bid/ask spread of just 0.01%, according to BlackRock.

Despite being down about 1.8% so far in 2018, AGG has seen roughly $4.8 billion in flows year-to-date. It has a yield-to-maturity of 3.27% and a dividend yield of 2.51%.

AGG is one of the stalwarts among ETFs, and it has a number of competitors. The largest is the Vanguard Total Bond Market ETF (BND), which tracks a very similar benchmark, if not the same one. BND has $36 billion in assets under management and comes with an expense ratio of 0.05%.

Two other competitors track the exact same index as AGG and charge only 0.04%, but still lag it in terms of assets. The Schwab U.S. Aggregate Bond ETF (SCHZ) and the SPDR Portfolio Aggregate Bond ETF (SPAB) have $5 billion and $3 billion in AUM, respectively. All of AGG’s competitors launched in the wake of the trail it blazed, and none has come close to it in size.

Chart courtesy of StockCharts.com

Contact Heather Bell at [email protected]