AGG Delivers Superior Cost Efficiency and Broader Market Exposure Compared to IEI

Overview - AGG features a significantly lower expense ratio at just 0.03% versus 0.15% as a fraction compared to IEI - AGG provides more extensive diversification with 13,000+ holdings while IEI contains only 84 Treasury positions - Both funds offer U.S. bond exposure, but AGG captures the entire investment-grade market while IEI targets only intermediate-term Treasuries

The iShares Core US Aggregate Bond ETF (AGG) emerges as the more economical choice, featuring substantially lower costs, vastly broader holdings, and a marginally higher yield than the iShares 3-7 Year Treasury Bond ETF (IEI). However, the trade-off involves greater historical volatility. These two IShares fixed-income products cater to different investment philosophies. AGG seeks comprehensive exposure across the full spectrum of U.S. investment-grade bonds, whereas IEI narrows its focus to the intermediate tier of U.S. Treasury securities. This analysis examines expense structures, yield potential, risk characteristics, and portfolio composition to guide investors toward the most suitable option.

Cost Structure & Income Generation

AGG demonstrates clear cost advantages with an expense ratio representing just one-fifth of IEI’s fee structure. This 0.15% differential—though seemingly modest—compounds meaningfully over extended holding periods. Beyond lower expenses, AGG also delivers superior income generation, with a 3.9% dividend yield outpacing IEI’s 3.5%. These dual benefits position AGG as the more efficient vehicle for yield-focused investors.

Risk & Historical Performance Analysis

The performance backdrop reveals a nuanced picture. While AGG’s lower fees and higher dividend yield appear attractive, its five-year drawdown of -17.83% significantly exceeded IEI’s -14.05% decline. An investor deploying $1,000 into IEI five years ago would have retained $903 in value, whereas AGG investors held $857. This disparity underscores the volatility premium associated with broader portfolio exposure.

Portfolio Composition & Diversification Strategy

AGG maintains a comprehensive approach to bond market exposure, encompassing over 13,000 individual securities spanning its 22-year track record. The fund blends government obligations with corporate debt instruments, with BlackRock (NYSE: BLK) representing 2.66% of holdings and U.S. Treasury Notes maturing February 2, 2035, comprising 0.42%. This concentration in large issuers reflects AGG’s market-capitalization weighting methodology.

IEI pursues a narrower, Treasury-exclusive strategy with precisely 84 holdings. Its top exposures center on intermediate-maturity Treasury Notes: February 15, 2029 maturity (4.08%), November 30, 2030 maturity (3.60%), and May 15, 2029 maturity (2.93%). This focused approach eliminates exposure to corporate credit risk entirely.

Both funds operate without leverage or currency hedging overlays, maintaining straightforward exposure to their respective bond markets.

Investment Implications & Realistic Returns

For investors seeking stable income deployment, both ETFs represent defensible choices within the fixed-income spectrum. Yet five-year historical returns paint a sobering picture. Investors purchasing IEI in early 2021 and retaining dividends realized merely 0.96% total returns—barely above inflation. AGG investors tracking an identical timeline faced a -0.7% total return, accounting for reinvested distributions.

The disappointing returns reflect the interest rate environment of 2021-2024, when rising rates compressed bond valuations. Potential normalization through Federal Reserve rate reductions could materially shift this outlook into positive territory.

AGG’s market-cap weighting methodology concentrates exposure toward the largest debt issuers—not necessarily entities offering the most attractive risk-adjusted returns. Investors uncomfortable with this concentration bias may prefer IEI’s Treasury-only purity.

Key Definitions

ETF (Exchange-traded fund): Investment fund containing multiple securities, trading on public exchanges with stock-like flexibility.

Expense ratio: Annual operational costs expressed as a percentage of average fund assets, directly impacting net returns.

Diversification: Risk-reduction strategy distributing capital across numerous securities to minimize individual holding impact.

Dividend yield: Annual cash distributions relative to current market valuation.

Maximum drawdown: Largest percentage decline from peak to trough across a specified timeframe.

Total return: Cumulative performance including price appreciation and all income distributions, assuming reinvestment.

Investment-grade bond: Debt security receiving relatively safe credit ratings from established rating agencies.

Intermediate-term bond: Fixed-income security with medium-length maturity, typically three to ten years.

U.S. Treasury bond: Government-issued debt instrument financing federal operations.