Barclays U.S. Aggregate Bond Index ETFs -- 3 Ways to Make Investing in Bonds Easier

For proper asset allocation, it's important to maintain an age-appropriate portfolio of stocks and bonds. Unlike stocks, which can be quite volatile, bonds can add a conservative element to your investment strategy. The Barclays U.S. Aggregate Bond index can help you do this rather easily, by purchasing a fund that tracks the index.

Three ETFs that track the index include the iShares Core U.S. Aggregate Bond ETF (AGG -0.22%), the Vanguard Total Bond Market ETF (BND -0.21%), and the Schwab U.S. Aggregate ETF (SCHZ -0.25%)

Data Source: ETFdb.com. Fund assets, expense ratios, and recent share prices obtained on 6/5/17.

It's important to note that the Vanguard ETF tracks a float-adjusted version of the index, which simply adjusts for the fact that not all of the bonds that qualify for the index trade on the open market. Although this is a slightly different index composition, the idea is the same, and the underlying investment performance has been and should continue to be virtually identical. To illustrate this, consider that the five-year annualized performance of the Vanguard and iShares funds has been 2.26% and 2.27%, respectively. Over one- and three-year periods, the returns have also been very close.

A bond fund like these can help make your investment strategy easier. Image source: Getty Images.

What is Barclays U.S. Aggregate Bond Index?

In a nutshell, the Barclays U.S. Aggregate Bond Index is a broad bond index that is designed to measure the performance of the U.S. investment grade, taxable bond market. This includes U.S. Treasuries and other government bonds, mortgage-backed securities, as well as corporate bonds that are of sufficiently high credit quality. It excludes bonds such as tax-free municipals, as well as bonds that are not of investment-grade credit quality (junk bonds).

Why invest in these ETFs, and which is best for you?

As I mentioned in the introduction, all properly diversified investment portfolios should have some allocation of bonds, also known as fixed-income investments. Younger investors should generally have less money allocated to bonds, while older investors should have more bond-heavy portfolios, but all investors should have some exposure to fixed-income investments, regardless of age.

Having said that, the main reason to use one of these ETFs in your portfolio is to make your bond investing as easy as possible. The bond market can be rather complicated, and unlike stocks, many bonds aren't the most liquid investments. So, using a fund like one of the three discussed here can make this portion of your portfolio easier, and take the guesswork out of bond investing.

As an example, the iShares fund has 6,202 different bond holdings as of June 2, 2017. The benefit of this much diversification is that if one of the fund's investments were to default, investors would barely feel the impact.

Since all three funds track the same index, it's tough to say that one is better than the others. The Schwab fund does have a slightly lower expense ratio, but all three are remarkably cheap. The difference between 0.05% and 0.04% expense ratios is the difference of $1 for every $10,000 you have invested -- in other words, it's not likely to have a major long-term impact on your performance.

The Foolish bottom line

Just like with stocks, if you have the time, knowledge, and desire to research and buy individual bonds, there's nothing wrong with doing so. However, for the majority of investors, a bond fund like one of these that track a broad index is the smartest way to go. Any of the three ETFs mentioned here could be a great fit in a properly allocated investment portfolio.