A Flagship Core Bond ETF

Key Morningstar Metrics for iShares Core US Aggregate Bond ETF

• Morningstar Medalist Rating: Gold
• Process Pillar: Above Average
• People Pillar: Above Average
• Parent Pillar: Above Average

IShares Core US Aggregate Bond ETF’s AGG conservative portfolio and razor-thin expense ratio make it a compelling option.

IShares Core US Aggregate Bond ETF tracks the Bloomberg US Aggregate Bond Index, which includes taxable, investment-grade US bonds with at least one year until maturity. Issuing activity in that market, which is dominated by US Treasuries, will dictate the portfolio’s composition. Market-value weighting emphasizes the most liquid issues by harnessing the market’s collective wisdom on the relative value of each bond.

The US investment-grade bond market is highly efficient and liquid, giving this fund an edge on pricier active strategies that must take greater risk to recoup their fees. Active managers allocate a higher percentage of assets to lower-quality bonds than this fund, and the performance of those credit-risky bonds helps steer peer-relative performance. About 74% of the fund’s assets carry an AA or AAA credit rating, higher than most category peers as of May 2024. Some competitors also hold a small allocation to high-yield bonds; this fund does not.

With less credit risk comes less reward, and IShares Core US Aggregate Bond ETF leaves yield on the table by focusing on US Treasuries and other highly rated debt. Its average coupon and 12-month yield consistently lag the Morningstar Category average, both falling around half-a-percentage point short of the category norm, as of April 2024. However, the current rate environment gives even the safest portfolios an appetizing yield. The fund’s SEC yield of 4.7% as of April 2024 is more than double what it was in early 2022.

Since credit risk is muted, interest-rate risk primarily drives this fund’s performance. Its average effective duration was 6.0 years as of May 2024. Its duration remains slightly little longer than the category average, despite it narrowing recently. This makes the fund more sensitive to interest-rate movements than some peers.

iShares Core US Aggregate Bond ETF: Performance Highlights

From its 2003 inception through April 2024, iShares Core US Aggregate Bond ETF outperformed the category average by 19 basis points annualized, with similar volatility.

Much of its outperformance can be attributed to its low fee and conservative credit risk profile, which helps protect the fund during credit shocks better than category peers. For instance, the fund outperformed the category average by 1.4 percentage points during the coronavirus-driven shock from Feb. 20, 2020, through March 23, 2020.

On the other hand, IShares Core US Aggregate Bond ETF’s quality tilt has worked against it when credit spreads tightened. The fund lagged the category average by 1.6 percentage points when markets recovered from the pandemic-fueled selloff in the last nine months of 2020.

A longer duration than peers can lead to underperformance when interest rates unexpectedly rise. In the final five months of 2016, when long-term bond yields climbed on the back of inflation concerns, the fund also trailed the category norm by 77 basis points. However, in the Fed’s most-recent tightening cycle, the fund has held its own. From March 2022 through February 2024, it fared slightly better than the category norm, as lesser credit risk more than offset heightened interest-rate risk. Performance differences will occur from time to time, but long term, its conservative portfolio and razor-thin expense ratio should support a durable advantage.