Bond exchange-traded funds (ETFs) are a useful device for modern fixed-income investors. These ETFs combine the relative stability and portfolio diversification of bond mutual funds with the intra-day liquidity of stocks. The best bond ETFs top it off with a low cost. In terms of assets managed, two of the largest players in the bond ETF space are the iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market ETF (BND).

The two funds held greater than $381 billion in total assets under management (AUM), as of September 2023. This level of AUM is greater than other bond ETFs and far outpaces the rest of the investment-grade broad market category. So when it comes to an AGG vs. BND review, which bond ETF is better?

BND vs. AGG: Background

AGG is a product of BlackRock Inc. and part of its successful iShares ETF series. It is the older of the two funds by three and one-half years, having launched in September 2003. Backed by all the resources of the world's largest money manager, this ETF doesn't lack for recognition or marketing. Portfolio managers James Mauro and Karen Uyehara were in charge of the ETF's day-to-day operations as of June 2023.

Meanwhile, the Total Bond Market ETF is Vanguard's preeminent domestic bond offering. In many ways, the Vanguard fund is a younger brother to the iShares fund. The two ETFs track the same index, albeit with slight variations in execution, and provide healthy competition for low fees, safety, and strong returns.

BND vs. AGG: Strategy

Both funds are passively managed ETFs. Passive investment strategies are designed to reduce total fund costs, making them less expensive investments. Before the BlackRock buyout, AGG was a much more expensive and sluggish fund, but competition has driven costs down sharply for both asset managers.

Both ETFs track the Bloomberg U.S. Aggregate Bond Index, the leading yardstick for domestic bond performance, though Vanguard's BND follows a float-adjusted version of the index. The Bloomberg Aggregate Bond Index is a market value-weighted collection of the whole U.S. bond market, excluding municipal bonds, Treasury inflation-protected securities (TIPS), and high-yield bonds.

BND vs. AGG: Measurable Data Characteristics

The Vanguard Total Bond Market ETF has $302.4 billion assets under management as of November 30, 2023, making it comparatively larger compared to the iShares ETF of $97.3 billion AUM as of November 7, 2023. The portfolio for the iShares ETF has a slightly longer average duration, at roughly 6.3 years relative to roughly 5.9 years. Each is very similar in terms of weighted average maturity and yield to maturity (YTM).

The two funds show remarkably consistent financial figures. As of December 2023, the iShares Core U.S. Aggregate Bond ETF (AGG) and Vanguard Total Bond Market ETF (BND) both had an expense ratio of 0.03%. They are the two most liquid bond ETFs, moving hundreds of millions of dollars per day in daily trades.

BND vs. AGG: Fundamental Risks

As bond-backed funds, the iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF are indirectly exposed to counterparty risks in their underlying portfolios. However, each risk profile is pretty similar. As of November 2023, 3.01% of iShares Core U.S. Aggregate Bond ETF was in AAA-rated bonds and 72.2% of were in AA-rated bonds. Alternatively, 67% of the Vanguard Total Bond Market ETF was in government bonds. Neither bond tends to hold any bond rated less than BBB.

Perhaps a larger concern for bond ETFs is inflation risk. Treasury-heavy bond ETFs may or may not have yields that are equal to or higher than inflation. With inflation peaking in 2022 at 9.1%, bond ETFs face the risk that investors will lose purchasing power even when still generating a profit. Interest rate risk is also a problem since the intermediate-term nature of these ETFs makes them more susceptible than shorter-term instruments.

BND vs. AGG: Performance and Expert Opinion

As of December 2023, iShares had an average annual return of 1.34% over the past 10 years, compared to Vanguard's of 1.35%. The iShares ETF has tended to be the more expensive fund over that period, so the Vanguard ETF probably demonstrated stronger true performance by a very small margin.

Expert opinion is almost universally positive for both funds, though rarely overwhelming. Morningstar awards three stars to each of these ETFs.

Ideal Investors

Because the strategies, portfolios, benchmarks, performances, and costs of the iShares Core U.S. Aggregate Bond ETF and the Vanguard Total Bond Market ETF are so similar, there isn't an investor group more suited for one or the other. Generally speaking, either fund can fit as a core holding for retirement-conscious investors or as a satellite for those who want high-grade domestic bond exposure. Low yields and small returns make them ill-suited for younger or more aggressive traders.

The Bottom Line

The Vanguard Total Bond Market ETF (BND) and the iShares Core U.S. Aggregate Bond ETF (AGG) are both ETFs designed to provide investors with diversified exposure to the U.S. bond market. Both ETFs offer broad coverage of various bond types, though they do track to different indices. Both BND and AGG are passively managed, typically feature low expense ratios, and very generally have similar performance.