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Key takeaways

  • Interest rates have ticked higher, though they remain low by historical standards.
  • With rates low, bond fund expenses eat up a higher percentage of the portfolio yield.
  • Low-cost bond ETFs can help investors lower costs and keep more of what they earn.

Simple math matters: When interest rates are near historic lows, bond fund fees can eat into take-home returns.

AGG fees compared with peer core bond mutual fund average

Chart: AGG fees compared with peer mutual fund average

Source: BlackRock, Bloomberg and Morningstar as of 3/1/2020. Benchmark yield represented by the yield to worst on the Bloomberg Barclays US Aggregate Bond Index. Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
† The Morningstar Core Bond Category average is the average management for ETFs and mutual funds, inclusive of active and passive, within the category as calculated by Morningstar.


Falling bond yields

Despite a recent rise in rates, government bond yields remain historically low.1

Chart: Falling bond yields

Source: BlackRock, Bloomberg and US Federal Reserve as of 3/1/2020. Core bond yields represented by the yield to worst on the Bloomberg Barclays US Aggregate Bond Index. Past performance is not indicative of future results.

One way for professional and do-it-yourself investors to help ensure they maximize income is to own funds with low management fees. Index-tracking bond exchange traded funds (ETFs) have become a popular way to invest in bonds, in part because they generally cost less than their active mutual fund peers.

Consider that the iShares Core U.S. Aggregate Bond ETF (AGG) has an expense ratio of 0.04%, while the average fund in the peer group (Morningstar Core Bond Category) has an expense ratio of 0.64%.

The upshot is that bond ETFs, which iShares pioneered almost two decades ago, offer exposure to precise parts of the bond market and enable investors to build efficient portfolios at a low cost.

Karen Schenone, CFA
Head of U.S. iShares Fixed Income Strategy
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