What gives iShares Core US Aggregate Bond ETF an advantage?

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IShares Core US Aggregate Bond ETF’s (AGG) FEUSA’s low fees and conservative portfolio make it hard to beat. The fund obtains a gold rating from Morningstar analysts.

The strategy tracks the Bloomberg US Aggregate Bond Index, which includes taxable US dollar-denominated investment-grade bonds with at least one year to maturity. Most eligible bonds fall into three categories: US Treasuries, corporate bonds, or agency mortgage-backed securities. The index weights its holdings by market value, steering the portfolio towards the largest and most liquid issues. Accordingly, the portfolio accurately represents the US investment grade bond market.

The US government is the largest issuer of debt in the world. By the end of 2021, the total market value of US government bonds was more than double that of all US corporations. As of April 2022, the fund invested 41% of its assets in government securities, while its average counterpart held only 32%. Conversely, the fund held 29% of its portfolio in securitized debt against 33% for its average counterpart.

About 72% of the fund’s assets had a AAA credit rating in April 2022, while the corresponding figure for the average of Morningstar’s mid-grade core bonds was 50%. The relative performance of the fund class will largely depend on the performance of credit risk bonds. It should hold up well during times when credit markets are stressed, but it will lag when they recover.

As it takes little credit risk, the main driver of the fund’s absolute performance will be interest rate risk. As of March 2022, its average effective life was around 6.78 years, which was slightly higher than its peers.

While taking on less credit risk than its peers may put the fund at a disadvantage when markets are quiet, the fund’s low fees should help it keep pace. The fund’s 0.03% annual fee is 56 basis points lower than the mid-tier core bond category average.

Key Morningstar Proprietary Metrics

Morningstar Analyst Rating: Gold
Process Pillar: Above average
People Pillar: Above average
Parental pillar: Above average

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