The Vanguard Total Bond Market ETF (BND ) became the largest individual bond ETF in the U.S. at the end of last week, nudging ahead of the long-time leader, the iShares Core Aggregate Bond ETF (AGG ). As of August 5, BND had $83.710 billion in assets and AGG had $83.707 billion, according to FactSet data used by VettaFi. Despite BND’s success, iShares remains the largest ETF provider more than 20 years after launching the first products, and it manages the most fixed income ETF assets.
When we wrote about this likelihood on July 19, there was an approximately $400 million gap between the two broad market, investment-grade bond ETFs. While AGG has pulled in $838 million since then, BND was even more popular, gathering almost $1.3 billion of net inflows.
Year-to-date through August 5, BND’s $7.7 billion cash haul was impressive compared to AGG, which incurred $501 million of net redemptions.
The two core bond ETF heavyweights charge identical fees, with 0.03% expense ratios, though they have slightly different short-term performance records. For example, AGG’s 8.5% year-to-date loss was fractionally narrower than BND’s 8.7% decline.
The relative success for BND is likely tied to the growing usage of bond ETFs by retail investors and advisors that have historically preferred actively managed bond mutual funds, even as they shifted from active equity mutual funds to lower-cost, index-based equity ETFs.
For eight consecutive months dating back into December 2021, investors have redeemed money from bond mutual funds, according to the Investment Company Institute’s data, with more than $340 billion exiting these products. Investors long showed loyalty to bond mutual funds with the asset category generating monthly inflows between April 2020 and November 2021. In 2022, we believe there’s been a trend to tax-loss harvest away from more expensive bond mutual funds as losses have persisted. Vanguard has been a greater beneficiary of this, given its strong brand with mutual fund investors and their advisors.
Meanwhile, AGG has been a popular choice for institutional investors that favor the firm’s broad suite of bond ETFs including the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD ) and the iShares 20+ Year Treasury Bond ETF (TLT ) as well as AGG’s historically strong liquidity. Institutions are shifting away from owning individual bonds and replacing them with bond ETFs.
We believe there is significant room for growth of both BND and AGG in the years to come as more advisors turn to bond ETFs. These core bond ETFs can and do serve as building blocks in a broad asset allocation strategy, with more narrowly focused Treasury, investment-grade, and high yield ETFs providing satellite positions.
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