iShares Lehman Aggregate Bond (ETF) (AGG)

NetscribeETF (31.55) Submitted: 1/24/07 1:42 AM : Start Price: $98.65 AGG Score: -41.11

The fixed-income market, for a long time has lagged the exchange-traded fund boom, but can project a turnaround now, as ETF providers are gearing up to wrap every corner of the bond market. On the same line, ishares Lehman Aggregate Bond fund (AGG) has failed to attract investors’ sentiments since its inception in 2003.

The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the total United States investment grade bond market as defined by the Lehman Brothers U.S. Aggregate Index. Though it offers broad fixed-income exposure, the fund uses representative sampling to track its tally, which can sometimes prove detrimental to its returns. Endorsing the same, the fund has always lagged behind its benchmark index, reporting returns of 3.36% for the last one year as against 3.67% achieved by the benchmark index. Going further, it could get stung by rising interest rates.

This ETF invests in a smaller slice of the index and instead of owning all of the more than 6,600 securities in its target benchmark, it held less than 125 as of Nov. 30, 2006. Meanwhile, fairly recognized Fidelity U.S. Bond Index FBIDX seems to be well-diversified and own more than 1,300 issues as of the same date. Moreover, there also seems to be higher tracking error as AGG has trailed the Lehman Aggregate by 28 basis points since its inception.

With an average effective duration of 4.4 years, the bond fund looks more risky as longer-term bonds react with more volatility to interest-rate changes than do shorter term issues. Lastly, the ETF's 0.20% expense ratio is less than one third of the intermediate-term bond category average. Still, there are conventional options that can be purchased without a commission and charge the same annual fee, such as Vanguard Total Bond Market Index VBMFX. Given these reservations, the fund does not seem fit for the first priority.

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