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What's In Your Bond ETF?

I happen to hold both the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca:LQD) and the iShares Barclays Aggregate Bond Fund (NYSEArca:AGG), which may seem a little redundant, but the two are more different than you might think—and in different ways than you might think.

Let’s look at performance. Unsurprisingly, it depends on the time period that you choose, but no matter which fund wins, the differences are pretty significant.

Over the past year, LQD has, for the most part, steadily outperformed AGG, including in the highly volatile aftermath of Standard ' Poor’s U.S. debt downgrade on Aug. 5.

LQD vs. AGG:1-year performance

The five-year graph shows a slightly different picture.

LQD vs. AGG:5-year performance

LQD got hit much harder than AGG in the 2008 market crash, though it also recovered more rapidly. LQD has a much higher effective duration than AGG:7.37 compared with 4.29, respectively, according to iShares. Duration measures a bond’s sensitivity to interest rates, so a higher effective duration means that for a given change in interest rates, LQD will move more than AGG will.

Another big difference between the two is the distributions.

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LQD consistently distributes higher payments than AGG—definitely a plus if you’re investing in bonds for income.

There’s an easy explanation for these differences—the funds are completely different. It would be easy to assume that by investing in AGG, you’d get exposure to a mixture of high-yield bonds, investment-grade bonds, Treasurys, munis, etc.—basically, the aggregate bond market.

You would be right, but also wrong. The Barclays Capital Aggregate Bond Index, which AGG attempts to track, is a market-value-weighted index. That basically means that the biggest debtors get the biggest weights in the index. In the case of AGG, that translates into being heavily overweight Treasurys and mortgage-backed securities (MBS).

AGG holds 41 percent of its assets in U.S. government debt and about 34 percent in MBS. About 19 percent of AGG’s holdings are in investment-grade corporate bonds, with the rest scattered among local government debt, supranational debt and sovereign debt from other countries.

Less than one-third of 1 percent of assets go into high-yield bonds—by both S'P’s and Moody’s measures—according to iShares.

LQD, on the other hand, simply holds investment-grade corporate bonds. So, if you’re leery of MBS and already have exposure to government debt, AGG is probably not the fund for you.

Plus, at 22 basis points a year, it’s more expensive than LQD’s 15 basis point expense ratio, anyway.

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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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