'AGG' ETF Still a Great Option for Core Bond Exposure

“Of the 750-plus fixed-income exchange-traded funds on the menu, iShares Core U.S. Aggregate Bond ETF is the largest,” wrote Neal Kosciulek in Morningstar. “It is also one of the oldest fixed-income ETFs, having launched in September 2003. Long the barometer for U.S. investment-grade bonds, AGG’s benchmark–the Bloomberg Barclays U.S. Aggregate Bond Index–has changed drastically in the years since the financial crisis. Prior to 2008, Treasury bonds made up approximately 20% of the index. Following a surge in government bond issuance, that number currently now sits at 40%.”

Fund facts:

• AGG seeks to track the investment results of the Bloomberg Barclays U.S. Aggregate Bond Index.
• The index measures the performance of the total U.S. investment-grade bond market.
• The fund generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

Reasons to use AGG:

• Broad exposure to U.S. investment-grade bonds
• A low-cost easy way to diversify a portfolio using fixed income
• Use at the core of your portfolio to seek stability and pursue income

With Treasury yields near lows thanks to the central bank cutting interest rates this year, AGG might not be the best option for yield-started investors. However, for those looking for overall bond exposure–say, for a 60-40 capital allocation strategy, using an ETF like AGG would help especially given the amount of investment-grade debt issues it holds.

“This is a conservative portfolio with minimal credit risk, which can make it a low hurdle for active managers,” Kosciulek noted. “That does not make this an unattractive proposition, as risk and return are highly correlated in the fixed-income market. More than 70% of the assets in this portfolio carry a AAA rating, making it one of the more conservative options in the category. After controlling for risk, this portfolio is tougher to beat. Like most investment-grated portfolios, interest-rate risk is the biggest driver of returns here. Its average effective duration is about 5.5 years, as of this writing, while the category average is about 4.75 years.”

As 2019 comes to a close, it’s going to be another banner year for bonds, which have moved higher along with stocks thanks to an uncertain economic backdrop that saw investors pile heavily into bonds, especially during the summer.

“As 2019 begins to draw to a close, investors are looking at how their investment portfolios have performed,” wrote Dan Caplinger in Motely Fool. “For the most part, stock investors have to be pleased with how the year has gone, with returns of close to 25% for the S&P 500 and many individual stocks having shown even bigger gains.”

“Yet what’s surprising is that in a year in which stocks are performing well, the bond market has also managed to produce solid returns,” Caplinger added. “As you can see below from the year-to-date returns of various iShares bond ETFs, those who invested their money in Treasury bonds with longer maturities got rewarded handsomely, while even investors who opted for lower-risk short-term Treasuries still managed to see gains for the year.”

BondMatInvestors who have stuck with the common 60-40 portfolio mix, 60% stocks and 40% bonds, have been reaping the rewards of the duality in gains for both asset classes.

“As investors look at 2020, many believe that 2019’s strong returns for bonds aren’t likely to repeat. Yet the bond market has defied calls for an imminent implosion for years, and those who’ve stuck with an asset allocation model that includes both stocks and bonds have been richly rewarded.