AGG vs BND: The Closest Call in ETF Investing
If you are looking for a comparison where one fund clearly beats the other, AGG vs BND is not it. These two bond ETFs are so similar that choosing between them is less about analysis and more about personal preference. But let's dig into the details anyway, because understanding what makes them tick will make you a better fixed-income investor.
Both funds provide broad exposure to the US investment-grade bond market — Treasuries, corporate bonds, mortgage-backed securities, and government agency bonds. They are the two most popular core bond holdings in the world.
Index Comparison: Nearly Identical Benchmarks
AGG tracks the Bloomberg U.S. Aggregate Bond Index. BND tracks the Bloomberg U.S. Aggregate Float Adjusted Index. Yes, they are both Bloomberg Aggregate indexes — the difference is the "float adjusted" part.
BND's float-adjusted index excludes bonds held by the Federal Reserve. When the Fed buys Treasury bonds and mortgage-backed securities (as it did extensively during quantitative easing), those bonds are no longer freely tradable on the open market. BND's index removes them, reflecting only the bonds that investors can actually buy and sell.
AGG's index includes all qualifying bonds regardless of who holds them. In practice, this means AGG may have slightly different allocations to Treasuries and MBS compared to BND, depending on the Fed's current holdings. The differences are small and shift over time as the Fed adjusts its balance sheet.
Expense Ratio: A Tie
Both AGG and BND charge an expense ratio of 0.03%. On a $100,000 bond allocation, you pay $30 per year with either fund. Cost is not a factor in this comparison.
Yield and Income
The SEC yield (the standardized measure of bond fund yield) for AGG and BND is virtually identical at any point in time, typically within a few basis points. This makes sense — they hold nearly the same bonds in nearly the same proportions.
Both funds distribute income monthly, which is standard for bond ETFs. If you are relying on your bond ETF for regular income — perhaps in a retirement portfolio — either fund will deliver a very similar monthly payment.
Bond yields fluctuate based on interest rates. When the Federal Reserve raises rates, new bonds offer higher yields, and the yield on AGG and BND rises (while their prices fall). When rates drop, the reverse happens. This interest rate sensitivity affects both funds equally.
Duration and Interest Rate Risk
Duration measures how sensitive a bond fund is to interest rate changes. Both AGG and BND have an effective duration of roughly 6-7 years, meaning a 1% rise in interest rates would cause approximately a 6-7% drop in the fund's price.
This intermediate duration is by design — the Bloomberg Aggregate Index includes bonds of all maturities, resulting in a blended duration that sits between short-term and long-term funds. If you want less interest rate sensitivity, look at short-term bond ETFs. If you want more, look at long-term bond ETFs. Learn more in how to pick a bond ETF.
Credit Quality
Both funds maintain a high average credit quality. The Bloomberg Aggregate Index only includes investment-grade bonds (rated BBB or above by major rating agencies). This means no high-yield "junk" bonds are included in either fund.
The credit quality breakdown is nearly identical between AGG and BND: roughly 40-45% US Treasuries, 25-30% mortgage-backed securities, 20-25% investment-grade corporate bonds, and a small allocation to government agency bonds. You are getting a diversified, high-quality fixed income portfolio with either fund.
Holdings Count
AGG holds over 12,000 individual bond positions. BND holds over 10,000. In both cases, this is an enormous number of individual securities providing deep diversification. The risk of any single bond defaulting having a material impact on either fund is virtually zero.
Neither fund actually owns every bond in its index — that would be impractical given the size of the US bond market. Both use a sampling approach, owning a representative subset of bonds that closely replicates the characteristics of the full index. This sampling methodology is standard practice for bond ETFs and is highly effective at matching index performance.
Tracking Error
Both AGG and BND track their respective benchmarks with minimal tracking error. Because their indexes are so similar, the tracking errors relative to each other are also small. Any "performance difference" between AGG and BND in a given year is typically attributable to minor differences in index methodology, sampling, or the timing of cash flows — not to any fundamental advantage of one fund over the other.
Trading Volume and Liquidity
AGG has slightly higher average daily trading volume — typically 5-8 million shares per day vs BND's 4-6 million. Both funds have tight bid-ask spreads and ample liquidity for retail investors. You will have no trouble buying or selling either fund at fair prices.
For institutional investors making very large trades, AGG's slightly higher volume may offer a marginal advantage. For individual investors, the liquidity difference is irrelevant.
Provider and Brand
AGG is managed by iShares (BlackRock), the world's largest ETF provider. BND is managed by Vanguard, the second-largest ETF provider and the pioneer of low-cost indexing. Both are among the most respected names in the industry.
If you already use Vanguard for your brokerage and other ETFs (VTI, VXUS), BND fits naturally into your lineup. If you use iShares or another broker, AGG is equally well-suited. Some investors prefer to keep all their holdings with one provider for simplicity, and that is a perfectly reasonable tiebreaker.
Tax Considerations
Bond interest income is taxed as ordinary income, which is typically at a higher rate than qualified dividends or long-term capital gains from stock ETFs. This makes bond ETFs less tax-efficient than equity ETFs in taxable accounts.
For this reason, many financial planners recommend holding bond ETFs like AGG or BND in tax-advantaged accounts (IRA, 401k, HSA) whenever possible. If you need fixed income in a taxable account, consider municipal bond ETFs, which offer tax-exempt income at the federal level. Learn more about ETF tax efficiency.
Role in a Portfolio
Both AGG and BND serve the same role: the core fixed-income anchor of a diversified portfolio. They reduce overall portfolio volatility, provide steady income, and offer a counterweight to stock market declines (though this relationship has weakened in some recent environments).
In a three-fund portfolio, BND is the standard recommendation for the bond component (paired with VTI and VXUS). AGG would work equally well in this role. The choice does not affect the portfolio's strategic composition in any meaningful way.
For investors approaching or in retirement, a core bond holding like AGG or BND typically makes up 30-50% of the portfolio, depending on risk tolerance and income needs. See best ETFs for retirement for allocation guidance.
The Verdict
There is no wrong choice between AGG and BND. They charge the same fee, track nearly identical indexes, deliver virtually the same yield, carry the same duration risk, and hold the same types of bonds. The differences are academic.
If you need a tiebreaker: choose BND if you use Vanguard and want consistency with your other Vanguard holdings. Choose AGG if you use iShares or want the slightly higher trading volume. Choose whichever you already own and do not bother switching.
The more important decision is how much of your portfolio to allocate to bonds — not which of these two nearly identical funds to use. Compare them side by side on the AGG vs BND comparison page, or explore more bond fund options in the ETF directory.
