The Hottest Bond ETF Of 2016

In an era of ETF innovation, it’s a good old vanilla-type fund that’s gathering the most assets year-to-date.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

With all the excitement over new and novel ways to access the bond market via smart-beta ETFs, it’s a traditional oldie that’s gathering the most assets in the segment this year: the iShares Core U.S. Aggregate Bond ETF (AGG | A-98).

Fixed-income ETFs as a group have attracted roughly $8 out of every $10 headed into ETFs in 2016, raking in some $38 billion in fresh net assets so far this year. The rising popularity of bond ETFs has been largely linked to growing investor demand for ways to capture yield and to manage portfolio risk in the face of increased equity market volatility.

But the most popular bond fund this year is AGG, with net creations of nearly $5.4 billion so far. The 13-year-old fund is as plain vanilla as it gets, investing in more than 5,000 U.S. investment-grade bonds as it tracks a market-weighted index including Treasurys, commercial mortgage-backed securities, asset-backed securities and investment-grade corporate bonds.

“Investors have sought the relative safety of investment-grade U.S. bonds this year,” said Todd Rosenbluth, director of ETF & Mutual Fund Research for S&P Global Market Intelligence. “AGG is highly liquid and easy to transact by institutions and wealth managers.”

AGG has more than $37 billion in total assets and comes with a 0.08% expense ratio—$8 per $10,000 invested.

Consistent & Precision Returns

“In a segment where four funds (AGG, the Vanguard Total Bond Market Index Fund (BND | A-94), the Schwab US Aggregate Bond ETF (SCHZ | A-99) and the SPDR Barclays Aggregate Bond ETF (BNDS | A-98)) track essentially the same underlying index, holding and trading costs are the driving factors,” FactSet’s fund report on for AGG says. “AGG has one of the lowest expense ratios and delivers its underlying index’s returns with precision and consistency. The fund also has a history of massive trading volume and tight spreads.”

From a performance perspective, AGG has been steadily inching higher, and for much of the first five months of the year, it was outperforming the stock market, as measured by the SPDR S&P 500 (SPY | A-97)

Chart courtesy of

But it isn’t performance that’s driving AGG’s asset growth necessarily. iShares’ head of fixed income, Matt Tucker, also noted three other factors that are driving the popularity of AGG—and its competing ETFs—this year:

  • Embracing Duration

“With interest rates remaining at low levels, investors have not shown a great deal of concern about the potential for rising interest rates,” he said. “They have become more comfortable investing in intermediate duration funds like AGG, and even long-duration funds.”

AGG has effective duration—a measure of the portfolio’s sensitivity to interest-rate changes—of 5.26 years for a 30-day yield of 1.92%, according to iShares data.

Competing BND and SCHZ have similar profiles, with duration of 5.8 years and 5.2 years, respectively.

  • Focus On Fees

“With interest rates low, investors have increasingly focused on fees,” Tucker said. “High fee funds can erode a large portion of investor yield in a low-yield environment.”

AGG trades with an average spread of 0.01%, putting its total cost of ownership at 0.09%.

By comparison, BND charges 0.06% in expense ratio and trades with an average spread of 0.01%; SCHZ charges 0.05% and trades with a spread of 0.03%; BNDS charges 0.08% and trades with an average spread of 0.09%.

AGG is not the cheapest, but its fees are comparable with the key players in the segment, making its price tag a nonissue for investors looking to access the investment-grade bond universe. While that’s true today, it wasn’t always the case. Until later in 2012, AGG used to come with a 0.20% expense ratio. But iShares slashed fees on the fund to 0.08% in October 2012, and included this ETF in its much-cheaper Core lineup in October 2012.

  • Back To The Basics With Volatility

“Equity volatility in 2016 has led some investors to revisit why they invest in fixed income,” Tucker said. “Many investors look for fixed income to provide ballast to a portfolio, diversification against equity market movements.”

A fund like AGG provides this type of exposure, as does BND, SCHZ and BNDS. In fact, all four funds have seen asset inflows this year. BND has attracted $2.5 billion thus far in 2016; SCHZ has captured $733 million and BNDS has inflows of $226 million.

Contact Cinthia Murphy at [email protected].


Cinthia Murphy is head of digital experience, advocating for the user in all that does. She previously served as managing editor and writer for, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.