IGIB vs. AGG: Which iShares Bond ETF is Better?

Both the iShares 5-10 Year Investment Grade Corporate Bond ETF (NASDAQ:IGIB) and iShares Core U.S. Aggregate Bond ETF (NYSEMKT:AGG) are core bond ETFs from iShares, designed for investors seeking diversified exposure to the U.S. investment-grade fixed-income market. This comparison examines how their costs, performance, yields, risks, and portfolio makeup differ, helping investors decide which may be a better fit for their bond allocation.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

AGG is slightly more affordable, with a lower expense ratio. However, IGIB offers a substantially higher dividend yield, which may be more important for income-focused investors.

Performance & risk comparison

What's inside

With a 22-year track record, AGG is an established ETF that tracks the total U.S. investment-grade bond market, with 13,067 holdings. About 74% of the ETF’s holdings are AA-rated bonds, the second-highest rating a bond can receive.

IGIB, by contrast, focuses on U.S. dollar-denominated investment-grade corporate bonds with maturities of 5 to 10 years. Its holdings primarily consist of A bonds (44.29%) and BBB bonds (49.18%), which carry a higher risk of default than AAA and AA bonds but typically offer greater volatility and higher yields.

What this means for investors

What’s interesting about these two ETFs is that, even though IGIB has a higher dividend yield, AGG still pays a higher monthly dividend because it trades at a higher price. And when it comes to bond ETFs, investors should pay just as much attention to the types of bonds within the funds’ holdings, just as much as yields and expenses.

With AGG more focused on higher-rated bonds, it will be a less risky investment because it’s tied to bonds that are less likely to default. IGIB, on the other hand, has lower-rated bonds that have more potential to default, but there’s also more potential for yields to compensate for the increased risk it carries. It should also be noted that nearly half of AGG’s overall holdings are U.S. government bonds, while IGIB’s are less than 1%, posing more of a risk.

When choosing between these two ETFs, it’s more about whether investors prefer a high-risk/high-reward approach to the bond market or a less risky one.

Glossary

ETF (Exchange-traded fund): A fund holding a basket of securities that trades on an exchange like a stock.
Investment-grade bond: A bond rated relatively safe from default, issued by financially strong governments or companies.
Corporate bond: A bond issued by a company to raise money, typically paying periodic interest to investors.
Expense ratio: Annual fund operating costs expressed as a percentage of the fund's average assets.
Dividend yield: Annual cash distributions from a fund divided by its current share price, shown as a percentage.
Total return: Overall investment gain or loss, including price changes plus interest and dividends received.
Beta: A measure of how much an investment's price moves relative to a benchmark, often the S&P 500.
Max drawdown: The largest peak-to-trough decline in an investment's value over a specific period.
Volatility: The degree to which an investment's price fluctuates over time.
Liquidity: How quickly and easily an investment can be bought or sold without significantly affecting its price.
AUM (Assets under management): The total market value of all assets managed within a fund.
Intermediate-term: Refers to bonds maturing in roughly five to ten years, between short- and long-term maturities.

For more guidance on ETF investing, check out the full guide at this link.

Adé Hennis has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.