Vanguard’s BND Overtakes iShares’ AGG

Vanguard’s done it again. Last week, the company’s total bond market fund, BND, surpassed the total assets of AGG, a similar ETF from iShares that happens to cost twice as much as BND.

The come-from-behind story of the Vanguard Total Bond Market ETF (NYSEArca:BND) caps a four-and-a-half-year process that began when BND came to market in April 2007—more than three years after the iShares Barclays US Aggregate Bond ETF (NYSEArca:AGG). At the time of BND’s rollout, AGG had already raked in more than $5.6 billion in assets, according to IndexUniverse's "Fund Flows Tool."

The writing had been on the wall to ETF industry sources who have been watching the two bond funds that share similar indexes. In the end, BND surpassed AGG on Thursday, Dec. 1, ending the day with $13.80 billion, compared with $13.78 billion for AGG. BND has an annual expense ratio of 0.11 percent compared with 0.22 percent for AGG.

The story of BND eclipsing AGG as the biggest total bond market fund must seem all too familiar to San Francisco-based iShares. After all, in January the biggest ETF company in the world watched as its huge iShares MSCI Emerging Market Index Fund (NYSEArca:EEM) was dethroned as the largest developing-markets ETF by the Vanguard MSCI Emerging Markets ETF (NYSEArca:VWO). Price was at the center of that story too.

In fairness to iShares, AGG’s more-than-doubling in size since BND came on the scene in 2007 is nothing to scoff at. It’s a measure of how vibrant the ETF industry is that a rapidly growing fund like AGG could somehow seem like a laggard. In other words, if AGG’s ability to gather assets has been impressive since its launch in September 2003, BND’s has been superlative.

The Special Case Of Schwab

It’s no surprise that Vanguard’s funds are some of the cheapest on the market. After all, it has a mutual structure and, because shareholders in its funds are effectively company owners, it tries to run its funds at cost.

That gives it advantages over companies that must also deliver value to shareholders. iShares is owned by BlackRock Inc., a publicly traded corporation that lists its shares on the New York Stock Exchange.

However, being a publicly traded asset management company isn’t a definitive disadvantage in competing with Vanguard.

San Francisco-based Charles Schwab is the ultimate example of that. The company was founded with low costs at the core of its business strategy, and its so-far successful foray into proprietary ETFs is making that amply clear. It got into the ETF business in November 2009, and now has 15 ETFs that together have amassed $4.84 billion in assets, according to data compiled by IndexUniverse.

In July, Schwab rolled out its answer to BND and AGG, the Schwab U.S Aggregate Bond ETF (NYSEArca:SCHZ). True to form, SCHZ, and not BND, is now the cheapest total bond market ETF on the market. SCHZ has an expense ratio of 0.10 percent, or 9 percent cheaper than BND, and it has about $143.1 million under management.

The three bond funds, plus a fourth from State Street Global Advisors, all share the same benchmark:the Barclays Capital Aggregate Bond Market Index, a basket of U.S.-listed investment-grade bonds.

SSgA’s SPDR Barclays Capital Aggregate Bond ETF (NYSEArca:LAG) has a 0.17 percent expense ratio and has $300.9 million in assets, according to data compiled by IndexUniverse. It came to market just after BND, in May 2007.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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