The iShares Core U.S. Aggregate Bond ETF (AGG +0.37%) is one of the biggest exchange-traded funds (ETFs) focused on the bond market. AGG has over $126 billion in total assets under management (AUM). That puts it right behind the Vanguard Total Bond Market ETF, which leads with over $129 billion in AUM.
Investing in bonds (either directly or indirectly through ETFs like AGG) helps investors build a more diversified portfolio and generate income, which helps lower risk. Here's a look at how much an investment of $1,000 in AGG could turn into in the future and why investors would want to consider investing in a bond ETF.
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A high-quality bond ETF
The iShares Core U.S. Aggregate Bond ETF, or AGG, provides investors with broad exposure to U.S. investment-grade bonds. Investment-grade bonds are fixed-income investments with a lower risk of defaulting than non-investment-grade or junk bonds. They enable investors to lower the risk profile of their portfolio and generate investment income.
This fund currently holds over 12,600 bonds with maturities of as much as 20-plus years in the future. It has U.S. Treasury Bonds (45% of its holdings); mortgage-backed securities or MBS (24% backed by residential mortgage, and 1.5% backed by commercial mortgages); bonds issued by corporations (14% industrial, 8% financial institutions, and 2% utilities); and other bonds, including U.S. dollar bonds issued by foreign countries (1%) and municipal bonds (less than 1%). This broad exposure to the entire investment-grade bond market further reduces this ETF's risk profile.
AGG's returns
Those who have invested for a while know that there are always trade-offs. In the case of AGG, the trade-off is that the bond ETF's very low-risk profile comes with lower return potential. For the most part, the interest income paid by its bond holdings makes up its entire return.
Since its inception in 2003, AGG has delivered an average annual return of only 3.1%. It would have grown a $1,000 investment into over $1,800 at that rate. That assumes an investor reinvested the interest income paid by the ETF into buying more shares.
However, interest rates are higher today than they've been throughout much of this ETF's history. As a result, its current bond portfolio has an average yield to maturity of almost 4.8% (just below the historical average bond return of 5% over the last century). The fund could turn a $1,000 investment into more than $4,200 in about 30 years at that higher return rate.
The caveat is that while interest rates are currently higher, they might not be as high in the future. On the other hand, interest rates could also stabilize at an even higher level, enabling investors to generate even more income from this fund.
Given the returns, why invest in AGG?
Adding bonds to your portfolio can be a wise idea. While bonds have a lower return profile, they can also help significantly reduce the volatility of your portfolio. Here's a look at how adding a bond fund like AGG can help reduce risk without significantly sacrificing returns:
|
Portfolio Allocation |
Best Annual Return |
Worst Annual Return |
Average Annual Return |
|---|---|---|---|
|
100% stocks/0% bonds |
54.2% |
-43.1% |
10.5% |
|
80% stocks/20% bonds |
45.4% |
-34.9% |
9.7% |
|
60% stocks/40% bonds |
36.7% |
-26.6% |
8.8% |
|
50% stocks/50% bonds |
32.3% |
-22.5% |
8.2% |
|
40% stocks/60% bonds |
27.9% |
-18.4% |
7.7% |
|
20% stocks/80% bonds |
29.8% |
-14.4% |
6.4% |
|
0% stocks/80% bonds |
32.6% |
-13.1% |
5% |
Data source: Vanguard. NOTE: Returns data from 1926 to 2024.
As that chart shows, adding bonds to your portfolio (i.e., buying AGG) will lower your return potential. However, it will also help cushion the blow of a very bad year in the market.
Most financial advisors recommend that investors allocate a portion of their portfolio to bonds. The traditionally recommended allocation for a balanced portfolio is 60% stocks and 40% bonds. However, younger investors might want to hold a higher percentage of their portfolio in stocks, while older investors should consider a higher allocation to bonds. One good rule of thumb is that you should allocate your age to bonds (e.g., if you're 25, then you should consider having a 25% allocation to bonds).
Buying an ETF like AGG isn't about maximizing the value of your investment. Instead, you'd invest $1,000 into AGG to help lower the risk profile of your portfolio.
Buy AGG to reduce risk
Investing $1,000 into AGG won't grow it into a huge future windfall like a similar investment in a stock ETF might achieve. However, it should produce steady income while helping lower the risk profile of your entire portfolio. For many investors, that would enable them to still reach their financial goals while potentially having fewer sleepless nights worrying about stock market volatility.
