It’s about to have a new king of bond ETFs. Indeed, there might be a new one by the time you read this article. The Vanguard Total Bond Market ETF (BND) was $81.1 billion as of July 15, according to Factset data used by VettaFi, just $400 million less than the current leader in bond ETFs, the iShares Core Aggregate Bond ETF (AGG). Despite this, iShares remains the industry leader for all ETFs, as well as fixed income ETFs, as of mid-July.
According Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence, there was a $22 billion spread between the two major fixed income ETFs in March 2020. However, since then Vanguard’s offering has been the most popular ETF. Since early April, BND has raised $42.1 billion in new money, including $6.4 billion in 2022 alone, according to our data. In contrast, AGG has raised half of new funds since April 2022 ($21.1 billion) and suffered $1.3 billion in net redemptions.
The two core bond ETF heavyweights charge identical fees with expense ratios of 0.03%, although they have slightly different short-term performance. For example, AGG’s 9.8% year-to-date loss was slightly less than BND’s 10.0% decline.
The relative success of BND is likely linked to the growing use of bond ETFs by retail investors and advisors who have always preferred actively managed bond mutual funds, even as they have moved from active mutual funds to lower cost index ETFs. Additionally, unlike AGG, Vanguard shareholders can easily switch from a mutual fund share class to an ETF share class. We believe that some of BND’s ETF contributions stem from this activity.
For seven consecutive months dating back to December 2021, investors redeemed money from bond mutual funds totaling $305 billion, according to data from the Investment Company Institute. This contrasts sharply with monthly inflows for the asset class dating back to April 2020. In 2022, we believe there has been a trend to reap tax losses away from more expensive bond mutual funds, as losses have persisted. Vanguard was a bigger beneficiary because of its strong brand with mutual fund investors and their advisors.
However, we expect AGG and BND to continue to grow as a wide range of investors take advantage of the liquidity and tax-efficiency benefits of bond ETFs. Advisors are increasingly using these products to support their asset allocation goals, and institutional investors are tapping into liquidity from bond ETFs instead of stocking up on individual bonds.
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