Aggregate Bond ETFs: Closer Look Under The Hood

by on January 30, 2013 | ETFs Mentioned:

As the ETF landscape continues to evolve, investors can now gain cheap and easy access to nearly every corner of the investable universe. From hyper-targeted options to products that cast a much wider net, the over 1,400 funds in the ETF lineup continue to fill the demands and objectives of practically every investor. In recent years, innovation and interest in the fixed income ETF market has surged as many look to the space for its inherent stability and potential for meaningful current return. One of the most popular fixed income strategies is actually a simple one: establish well-rounded and diversified exposure to the entire U.S. investment grade bond market, a corner of the fixed income universe that has historically been associated with relatively low risk and a substantial source of income [see How To Pick The Right ETF Every Time].

While there are many funds in the Total Bond Market ETFdb Category, there are only a handful of ETFs that continue to dominate the space. A close look under the hood of some of the most popular “total bond market” ETFs reveals several factors investors should be mindful of.

Capturing the Total Bond Market: A Numbers Game

Though many of the broad-based products offer relatively deep portfolios, there is a rather significant discrepancy found among almost all of the most popular total bond market ETFs: the number of holdings. The interpretation by each issuer of what exactly is the “total bond market” comes to the forefront, as portfolio compositions range from a basket of 200 individual holdings to over 5,000. And although most of the allocations towards specific sectors are weighted similarly, the depth of holdings can certainly play a crucial factor, as concentration and diversification issues may impact bottom line returns.

The table below highlights four of the most popular total bond market ETFs, revealing the differences between the portfolio sizes, expense ratios and total assets under management [see Better-Than-AGG Total Bond Market ETFdb Portfolio]:

  • Core Total U.S. Bond market ETF (AGG, A+)
  • Total Bond Market ETF (BND, A)
  • Total Return ETF (BOND, B+)
  • SPDR Barclays Aggregate Bond ETF (LAG, A-)

Though the size of a portfolio does not necessarily dictate the performance of a specific ETF, it is important for investors to realize the differences in the number of holdings in these broad-based products. Furthermore, a close look at the expenses and portfolio allocations of these “total bond market” funds may reveal a more appealing ETF option that better fits an investor’s objective.

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Disclosure: No positions at time of writing