A Prudent Assessment of Bond ETFs

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The matter of securing a comfortable income from one’s capital is, as all sensible persons know, a delicate undertaking. The iShares Core US Aggregate Bond ETF (AGG 0.17%) presents itself as a rather comprehensive, if somewhat sprawling, estate, offering a breadth of holdings that might appeal to those seeking diversification. It is, however, necessary to compare it with more focused properties, such as the iShares 3-7 Year Treasury Bond ETF (IEI 0.18%), to determine which best suits a discerning investor’s requirements. Though AGG has, it must be admitted, experienced a more pronounced decline in value at times, a circumstance which, while regrettable, is not entirely unexpected in the vagaries of the market.

Both AGG and IEI are, of course, managed by the reputable house of iShares, yet they pursue distinct objectives. AGG endeavors to encompass the entirety of the U.S. investment-grade bond market – a considerable undertaking, one might observe – while IEI confines its attentions to intermediate-term U.S. Treasury bonds. This comparison, therefore, shall consider not merely cost and performance, but also the inherent risks and the composition of each fund, that a prudent judgment may be formed.

A Concise Overview

Metric IEI AGG
Issuer iShares iShares
Expense Ratio 0.15% 0.03%
1-Year Return (as of 2026-01-09) 4.1% 4.4%
Dividend Yield 3.5% 3.9%
AUM $17.7 billion $136.5 billion

The one-year return reflects price appreciation over the past twelve months, a measure useful, though not infallible, in assessing recent performance.

AGG demonstrates a pleasing economy in its management, with an expense ratio of a mere 0.03%, a fraction of IEI’s 0.15%. Furthermore, it offers a modestly superior yield of 3.9% compared to IEI’s 3.5%, a difference which, while not extravagant, is nonetheless worthy of consideration.

Performance and the Inherent Risks

Metric IEI AGG
Max Drawdown (5 Years) -14.05% -17.83%
Growth of $1,000 over 5 Years $903 $857

The Composition of Each Estate

AGG, in its ambition, holds over 13,000 securities, a vast and diversified collection accumulated over its 22.3-year history. Its principal holdings include Blackrock (BLK +0.56%) at 2.66%, and Treasury Notes maturing on February 2, 2035, representing 0.42% of the portfolio. This blend of governmental and private obligations, while comprehensive, may lack the focused security of a more concentrated holding.

IEI, by contrast, adheres to a more restrained approach, focusing exclusively on intermediate-term U.S. Treasury bonds, with a portfolio of 84 holdings. Its largest exposures are Treasury Notes maturing on February 15, 2029 (4.08%), November 30, 2030 (3.60%), and May 15, 2029 (2.93%). Both funds, it is to be noted, abstain from speculative practices such as leverage or currency hedging, preferring a straightforward approach to U.S. bond exposure.

For further guidance on the intricacies of ETF investing, a comprehensive guide is available at this link.

Considerations for the Discerning Investor

Should one seek a predictable repository for capital, both the iShares Core US Aggregate Bond ETF and the iShares 3-7 Year Treasury Bond ETF offer a degree of security. However, it must be confessed that neither has proven particularly rewarding as an income-generating investment over the past five years.

An investor purchasing either of these ETFs in early 2021 would find little cause for celebration. Including dividend payments received over the past five years, purchasers of IEI have realized a meager gain of 0.96%. Those investing in AGG, and retaining the dividends, find themselves down by 0.7% over the same period.

While the past five years have been disappointing for both, a change in monetary policy – should the Federal Reserve lower interest rates – could improve their prospects considerably.

AGG, in its attempt to encompass all corners of the bond market, allocates greater weight to those entities with the largest outstanding debts. This concentration, while a natural consequence of its approach, may not be to the taste of all investors, who might prefer a more equitable distribution of risk.

A Glossary of Terms

ETF (Exchange-traded fund): A fund holding many securities, traded on an exchange like a stock.
Expense ratio: Annual fund operating costs expressed as a percentage of the fund’s average assets.
Diversification: Spreading investments across many securities to reduce the impact of any single holding.
Dividend yield: Annual cash distributions from a fund divided by its current market price.
Beta: A measure of an investment’s volatility compared with a benchmark index, such as the S&P 500.
AUM (Assets under management): Total market value of all assets managed within a fund.
Max drawdown: The largest peak-to-trough decline in value over a specified period.
Total return: Investment performance including price changes plus all interest and dividends, assuming reinvestment.
Investment-grade bond: Bond rated relatively safe from default by major credit rating agencies.
Intermediate-term bond: Bond with a medium-length maturity, typically around three to ten years.
U.S. Treasury bond: Debt security issued by the U.S. government to finance its operations.
Leverage (in funds): Using borrowed money or derivatives to increase a fund’s exposure beyond its net assets.

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2026-01-19 00:53