Evaluating Bond ETF's - BND vs AGG

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
EvelynTroy
Posts: 337
Joined: Sat Jun 07, 2008 8:35 am

Evaluating Bond ETF's - BND vs AGG

Post by EvelynTroy » Mon Apr 10, 2017 7:36 am

I've recently received help here on calculating how to rebalance my portfolio - I've accomplished that and now deciding on reinvesting the equity ETF shares I sold. This is for an IRA account.
Have my eye on a 5 yr. CD credit union - but also considering:
Vanguard Total Bond Market - BND (0.06 ER)
IShares Core U.S. Aggregate Bond AGG (0.05 ER) -parent firm BlackRock as far as I know they are respected firm.

Both of these trade commission free at my brokerage TDAmeritrade.
I would appreciate help on understanding why one of these ETF's would be better than the other.
They both invest about 64% U.S. Govt backed with rest being investment grade corporate bonds.

Thank you. Evelyn

livesoft
Posts: 65508
Joined: Thu Mar 01, 2007 8:00 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by livesoft » Mon Apr 10, 2017 7:51 am

For all intents and purposes these two ETFs are not only the same, they are essentially identical.
Neither one would be better than the other one. Both have great daily volumes and bid/ask spread of 1 cent.

I own BOTH of the them at TDAmeritrade. The reason I own both is that both are no-commission, but only if one follows the 30-day rule. I built up a large position in AGG that I need to sell to buy equities. After equities went up in a few days, I needed to sell equities and buy bonds back. If I bought AGG back, then I would pay a commission, so I bought BND.

In essence, I have a large reservoir of AGG that I can use for raising cash for short-term trades and a large reservoir of BND when I want to restore my bond allocation. I suspect for you that will be unnecessary.

I think then about the only reason to prefer one over the other is the that the prices are different and one may be able to buy round lots or use up all their cash when making a purchase. For instance, if you have about $16206 to invest, then you could buy 200 shares of BND, but 149 shares of AGG. I have to write that 149 doesn't look as good to me as 200. But if you had $108,440 to buy bonds with, the 1000 shares of AGG fits nicely and 1338 shares of BND looks ugly.
Last edited by livesoft on Mon Apr 10, 2017 7:53 am, edited 1 time in total.
Wiki This signature message sponsored by sscritic: Learn to fish.

aristotelian
Posts: 5373
Joined: Wed Jan 11, 2017 8:05 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by aristotelian » Mon Apr 10, 2017 7:52 am

Looks like AGG (28%) has even more government mortgaged backed than BND (20%). Swedroe and some on this board do not like BND for that reason and would dislike AGG even more. His reasoning is that mortgaged backed bonds are subject to additional risks - they can drop in price if interest rates rise or fall - and the idea is that you generally want stability in the bond portion of your portfolio.

BND has more US Treasury bonds (42% to 37%). I would expect AGG to be slightly riskier, but slightly higher overall returns. Otherwise, six of one, half dozen of the other.

Also consider Intermediate Government (VGIT) or Intermediate Bond (BIV), both of which have zero government mortgaged-backed.

Topic Author
EvelynTroy
Posts: 337
Joined: Sat Jun 07, 2008 8:35 am

Re: Evaluating Bond ETF's - BND vs AGG

Post by EvelynTroy » Mon Apr 10, 2017 8:20 am

Thanks for the replies -
I knew Larry didn't like BND, but I never did know why - so this is helpful. As an aside I have great respect for Larry - his firm Buckingham managed my assets for awhile - they helped me a lot and not just the portfolio mgmt. No complaints - it was only the cost that I decided to manage myself.
I see VGIT and BIV have higher expense ratios - but also commission free.

I would be interested in knowing why the mortgaged backed bonds have that risk of price decline in either rising or falling interest rate environment?
Livesoft - no I'm not buying and selling within 30 days. Appreciate knowing the two are basically the same.

livesoft
Posts: 65508
Joined: Thu Mar 01, 2007 8:00 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by livesoft » Mon Apr 10, 2017 8:27 am

Government-backed mortgage securities are not to be confused with things like the old Countrywide mortgage-backed securities, that is, non-government-backed mortgage securities.
Wiki This signature message sponsored by sscritic: Learn to fish.

aristotelian
Posts: 5373
Joined: Wed Jan 11, 2017 8:05 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by aristotelian » Mon Apr 10, 2017 8:37 am

EvelynTroy wrote:Thanks for the replies -
I knew Larry didn't like BND, but I never did know why - so this is helpful. As an aside I have great respect for Larry - his firm Buckingham managed my assets for awhile - they helped me a lot and not just the portfolio mgmt. No complaints - it was only the cost that I decided to manage myself.
I see VGIT and BIV have higher expense ratios - but also commission free.

I would be interested in knowing why the mortgaged backed bonds have that risk of price decline in either rising or falling interest rate environment?
Livesoft - no I'm not buying and selling within 30 days. Appreciate knowing the two are basically the same.
I got this from Swedroe's book on Winning Bond Strategy. Basically if interest rates go down, everybody refinances. If interest rates go up, then bond prices go down. What you want is a stable interest rate environment. That said, Vanguard's GNMA fund has done well, with stable returns even through 2008-9 when interest rates bottomed out. Swedroe's book was written in 2005, so it is possible he has softened his stance, and Taylor Larrimore and others are fine with them as part of a diversified bond fund like BND.

viewtopic.php?t=37178
viewtopic.php?t=157642

Kevin22751
Posts: 35
Joined: Fri May 22, 2015 11:12 am

Re: Evaluating Bond ETF's - BND vs AGG

Post by Kevin22751 » Mon Jul 10, 2017 1:03 pm

EvelynTroy wrote:
Thanks for the replies -
I would be interested in knowing why the mortgaged backed bonds have that risk of price decline in either rising or falling interest rate environment?

Here's my take... When residential mortgage rates decline, borrowers refinance their loans to the lower rates. The flood of principal repayments from the pay-off of the old loans can only be re-deployed into the new lower rate mortgages, thus dragging down the expected return for a portfolio of mortgage back securities. The lower return from the lower rates brings down the value (price) of the bond (portfolio).

When rates go up, nobody re-finances their mortgages, so these fixed rate instruments decline in value in order to compete with the new higher rate loans. In addition, there is a duration impact in the rising rate scenario. Since borrowers are not re-financing at a "normal" rate, the duration of these bonds increases, and the longer duration causes larger bond price decreases as rates rise. In the world of interest rate sensitivity, they go from acting like an 8 to 10-yr bond to acting like a 15 or 20-yr bond, which will take a bigger price hit when rates rise.

My current choice in bond ETF's is BIV. 55% government, 43% corporate, 2% cash and other. With NO mortgage backed securities.

By comparison, BND is 45% government, 28% corporate, 24% mortgage backed, and 3% cash and other.

Happy Investing !!

User avatar
aj76er
Posts: 658
Joined: Tue Dec 01, 2015 11:34 pm
Location: Portland, OR

Re: Evaluating Bond ETF's - BND vs AGG

Post by aj76er » Mon Jul 10, 2017 2:34 pm

Since BND holds the market, and if GNMA's are so horrible in a rising rate env, it seems market participants may hold less of them under these situations. If that happens, BND would naturally have a smaller percentage of them which would lessen their impact.

Furthermore, don't GNMA's have higher interest to compensate for these risks? Similar to Muni's in higher tax brackets.

Holding BND is a belief that the market knows best; just like with other total market funds
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

Kevin22751
Posts: 35
Joined: Fri May 22, 2015 11:12 am

Re: Evaluating Bond ETF's - BND vs AGG

Post by Kevin22751 » Mon Jul 10, 2017 5:33 pm

aj76er wrote:Since BND holds the market, and if GNMA's are so horrible in a rising rate env, it seems market participants may hold less of them under these situations. If that happens, BND would naturally have a smaller percentage of them which would lessen their impact.

Furthermore, don't GNMA's have higher interest to compensate for these risks? Similar to Muni's in higher tax brackets.

Holding BND is a belief that the market knows best; just like with other total market funds

AJ76er - How do "market participants hold less" residential mortgage debt ? Who would they sell the GNMA's to ? Non-market participants ? ? ?

Don't expect any structural changes to the mortgage market... unless banks start holding mortgages instead of securitizing them... which the Feds would severely frown upon from a risk standpoint.

In order to compensate bondholders for mortgage pre-payment risk, the GNMA's would have to be comprised of residential mortgages with pre-payment penalties, and no such loans exist. Interest Rates ? Ha. There is certainly no pre-payment risk premium embedded in the interest rate of any 30-yr residential mortgage.

Bottom line: BND holds a complete representation of the market, a la Barclays Agg Index. If a sector of the market sucks, and BND holds that sector, then it will affect BND.

4nwestsaylng
Posts: 469
Joined: Thu Jun 15, 2017 2:03 am

Re: Evaluating Bond ETF's - BND vs AGG

Post by 4nwestsaylng » Mon Jul 10, 2017 5:58 pm

I have read the above arguments against mortgage backed securities, ie that they act like longer term bonds when rates are rising, by price dropping,but that they also drop in price when rates drop, due to early payoff and movement into the lower rate mortgages. Something does not add up here, you are saying that at any given interest rate snapshot, mortgage backed securities will see their price go down whether rates drop or rise from that point?
As noted above, the performance of GNMA funds does not seem to support that. Why would anyone want to hold mrotgage backed securities if they lose in both rising and falling interest rate situations (ie all the time in the market)?

A Boglehead
Posts: 34
Joined: Sat Dec 13, 2014 12:25 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by A Boglehead » Fri Mar 08, 2019 3:34 pm

I have a 401(k) at Fidelity, and want to buy a total market bond index fund. AGG is free to buy, but it's expense ratio is 0.05% with a 0.01% Fee Waiver through 6/30/2026, after which its expense ratio may increase. Fidelity also charges to sell AGG:

"The sale of ETFs is subject to an activity assessment fee (of between $0.01 to $0.03 per $1,000 of principal)."

Fidelity charges $4.95 to buy and sell BND. BND's expense ratio is 0.05%.

I'm torn between which to buy. I'm more familiar with BND since I already hold it in another account, and am afraid AGG's expense ratio will increase after the waiver ends. What do you think? Thank you!

livesoft
Posts: 65508
Joined: Thu Mar 01, 2007 8:00 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by livesoft » Fri Mar 08, 2019 3:43 pm

^I think you should find a total bond market index MUTUAL fund that has no transaction fees and buy that instead.

Full disclosure: I own shares of the following total bond market index funds: AGG, SPAB, FXNAX, VBTLX.
Wiki This signature message sponsored by sscritic: Learn to fish.

A Boglehead
Posts: 34
Joined: Sat Dec 13, 2014 12:25 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by A Boglehead » Fri Mar 08, 2019 4:37 pm

Thanks! I'm having a hard time finding a total bond mutual fund which is free to buy/sell, and has good reviews.

I think Fidelity charges $75 to buy VBTLX. Morningstar's review of FXNAX (formerly FBIDX) is

"Fidelity US Bond Index FBIDX provides broad, market-value-weighted exposure to the investment-grade fixed-income market at a good price, but there are other lower-cost alternatives with better index tracking records."

Thank you!

User avatar
vineviz
Posts: 3099
Joined: Tue May 15, 2018 1:55 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by vineviz » Fri Mar 08, 2019 4:50 pm

A Boglehead wrote:
Fri Mar 08, 2019 3:34 pm
I have a 401(k) at Fidelity, and want to buy a total market bond index fund. AGG is free to buy, but it's expense ratio is 0.05% with a 0.01% Fee Waiver through 6/30/2026, after which its expense ratio may increase. Fidelity also charges to sell AGG:

"The sale of ETFs is subject to an activity assessment fee (of between $0.01 to $0.03 per $1,000 of principal)."

Fidelity charges $4.95 to buy and sell BND. BND's expense ratio is 0.05%.

I'm torn between which to buy. I'm more familiar with BND since I already hold it in another account, and am afraid AGG's expense ratio will increase after the waiver ends. What do you think? Thank you!
Even if BlackRock doesn't renew the fee waiver on AGG (unlikely, IMHO), the ER on it would STILL be basically equal to BND and AGG will be cheaper to purchase.

It seems to me that AGG has no disadvantages relative to BND and many advantages.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

fwellimort
Posts: 48
Joined: Tue Feb 12, 2019 9:41 am

Re: Evaluating Bond ETF's - BND vs AGG

Post by fwellimort » Fri Mar 08, 2019 5:04 pm

A Boglehead wrote:
Fri Mar 08, 2019 4:37 pm
Thanks! I'm having a hard time finding a total bond mutual fund which is free to buy/sell, and has good reviews.
FXNAX is a fantastic option if you are in Fidelity. It's probably the lowest fee total market bond index in the market. I don't understand why you wouldn't want it? I don't know what Morningstar is comparing to but there really isn't a better total market bond fund at that fee range in the industry right now.

Image
Seems the lower fee did affect the results with FXNAX resulting $2 more in a $10,000 investment in comparison to VBTLX.
Either that or cause of tracking a different index.
If you are in Fidelity, no reason not to opt FXNAX as a replacement for VBTLX/BND. The performance is literally identical. Just look at its past 10 years. They straight out overlap each other almost perfectly.
Last edited by fwellimort on Fri Mar 08, 2019 5:14 pm, edited 12 times in total.

User avatar
oldcomputerguy
Posts: 3841
Joined: Sun Nov 22, 2015 6:50 am
Location: In the middle of five acres of woods

Re: Evaluating Bond ETF's - BND vs AGG

Post by oldcomputerguy » Fri Mar 08, 2019 5:05 pm

A Boglehead wrote:
Fri Mar 08, 2019 4:37 pm
Thanks! I'm having a hard time finding a total bond mutual fund which is free to buy/sell, and has good reviews.

I think Fidelity charges $75 to buy VBTLX. Morningstar's review of FXNAX (formerly FBIDX) is

"Fidelity US Bond Index FBIDX provides broad, market-value-weighted exposure to the investment-grade fixed-income market at a good price, but there are other lower-cost alternatives with better index tracking records."

Thank you!
FXNAX follows the Barclays Aggregate index, which is the same index that AGG follows. It has zero buy or sell commission, and an ER of 0.025%, lower than either AGG or VBTLX. Is there a reason you would not want to use FXNAX? The article you quote was describing FBIDX, which was formerly the Investor-level share class of the fund and which had a much higher ER than either FSITX (the Premium share class) or FXNAX, thus the mention of "lower-cost alternatives". I can't speak to how well FXNAX tracks the index versus other funds, although according to Fidelity's fund page for FXNAX, it seems it's followed pretty closely.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

livesoft
Posts: 65508
Joined: Thu Mar 01, 2007 8:00 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by livesoft » Fri Mar 08, 2019 6:30 pm

A Boglehead wrote:
Fri Mar 08, 2019 4:37 pm
....
Morningstar's review of FXNAX (formerly FBIDX) is

"Fidelity US Bond Index FBIDX provides broad, market-value-weighted exposure to the investment-grade fixed-income market at a good price, but there are other lower-cost alternatives with better index tracking records."
Stop reading opinions at Morningstar.com. Just look at the data for yourself. I can say that for opinions at bogleheads.org, too.
Wiki This signature message sponsored by sscritic: Learn to fish.

A Boglehead
Posts: 34
Joined: Sat Dec 13, 2014 12:25 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by A Boglehead » Sat Mar 09, 2019 12:59 pm

Thank you all! I bought FXNAX.

User avatar
emlowe
Posts: 209
Joined: Fri Jun 01, 2018 2:57 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by emlowe » Sat Mar 09, 2019 4:31 pm

A Boglehead wrote:
Fri Mar 08, 2019 3:34 pm
I have a 401(k) at Fidelity, and want to buy a total market bond index fund. AGG is free to buy, but it's expense ratio is 0.05% with a 0.01% Fee Waiver through 6/30/2026, after which its expense ratio may increase. Fidelity also charges to sell AGG:

"The sale of ETFs is subject to an activity assessment fee (of between $0.01 to $0.03 per $1,000 of principal)."

Fidelity charges $4.95 to buy and sell BND. BND's expense ratio is 0.05%.

I'm torn between which to buy. I'm more familiar with BND since I already hold it in another account, and am afraid AGG's expense ratio will increase after the waiver ends. What do you think? Thank you!
The fee for selling the AGG ETF is the "SEC fee" is it not? It's charged everywhere, AFAIK

A Boglehead
Posts: 34
Joined: Sat Dec 13, 2014 12:25 pm

Re: Evaluating Bond ETF's - BND vs AGG

Post by A Boglehead » Thu Mar 14, 2019 10:05 pm

Thanks! I don't know.

Post Reply