The iShares Core US Aggregate Bond ETF (AGG 0.17%) stands out for its much lower cost, broader diversification, and slightly higher yield compared to the iShares 3-7 Year Treasury Bond ETF (IEI 0.18%), though it has experienced a deeper historical drawdown.

Both AGG and IEI are popular fixed-income funds from IShares, but they serve different purposes. AGG seeks to capture the entire U.S. investment-grade bond market, while IEI focuses solely on intermediate-term U.S. Treasury bonds. This comparison looks at cost, performance, risk, and portfolio makeup to help decide which may suit an investor's needs.

Snapshot (cost & size)

The 1-yr return represents stock price appreciation over the trailing 12 months.

AGG looks more affordable thanks to its 0.03% expense ratio, a fraction of IEI's 0.15%, and also offers a modestly higher yield at 3.9% versus 3.5% for IEI.

Performance & risk comparison

What's inside

AGG is designed to cover the total U.S. investment-grade bond market, holding over 13,000 securities as of its 22.3-year history. Its top positions include Blackrock  (BLK +0.63%) at 2.66%, and Treasury Notes that mature on Feb. 2, 2035, at 0.42% of the portfolio, reflecting a blend of government, and private company investments.

IEI, by contrast, focuses exclusively on intermediate-term U.S. Treasury bonds, with 84 holdings. Its largest exposures are Treasury Note that mature on Feb. 15, 2029, at 4.08%, Treasury Notes that mature on Nov. 30, 2030, at 3.60%, and Treasury Notes that mature on May 15, 2029 at 2.93%. Both funds avoid quirks like leverage or currency hedging, sticking to straightforward U.S. bond exposure.

For more guidance on ETF investing, check out the full guide at this link.

What this means for investors

If you're looking for a predictable place to park your cash, you could do a lot worse than the iShares Core US Aggregate Bond ETF or the iShares 3-7 Year Treasury Bond ETF. That said, these haven't been great income investments over the past five years.

Investors who bought either one of these ETFs in early 2021 don't have a lot to smile about. If you include dividend payments received over the past five years, investors who bought the iShares 3-7 Year Treasury Bond ETF have realized a measly 0.96% gain. Folks who invested in the iShares Core US Aggregate Bond ETF and held the dividends are down by 0.7% over the same time frame.

While the past five years have been disappointing for both of these ETFs, the returns they provide could swing deep into positive territory if the Federal Reserve lowers interest rates.

While the iShares Core US Aggregate Bond ETF represents thousands of debt issuers, bonds belonging to entities with the largest amounts of outstanding debt are given a higher weight. This leads to concentration in the largest issuers of debt, which aren't necessarily the entities you'd like exposure to.

Glossary

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.