Why bond fund fees matter


Karen Veraa, CFA Mar 11, 2021

KEY TAKEAWAYS

KEY TAKEAWAYS

  • Interest rates have ticked higher, though they remain low by historical standards.
  • With rates changing, bond fund expenses can 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.

Chart showing AGG fees compared with peer core bond mutual fund average

Source: BlackRock, Bloomberg and Morningstar as of 12/31/2021. Benchmark yield represented by the yield to worst on the Bloomberg US Aggregate Bond Index.



Falling bond yields

Chart showing falling bond yields, despite a recent rise in rates

Source: BlackRock, Bloomberg, US Federal Reserve as of 03/31/2022. Core bond yields represented by the yield to worst on the Bloomberg US Aggregate Bond Index. Fed Funds represented by the Federal Funds Target Rate-Lower Bound. 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 0.03% compared to the category average for mutual funds at 0.59%.2

The upshot is that bond ETFs, which iShares pioneered almost two decades ago3, offer exposure to precise parts of the bond market and enable investors to build efficient portfolios at a low cost.

Karen Veraa, CFA

Karen Veraa, CFA

Head of U.S. iShares Fixed Income Strategy