AGG vs. VMBS: What’s The Difference?

The iShares Core U.S. Aggregate Bond ETF (AGG) and the Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) are both among the Top 100 ETFs. AGG is a iShares Intermediate-Term Bond fund and VMBS is a Vanguard Intermediate Government fund. So, what’s the difference between AGG and VMBS? And which fund is better?

The expense ratio of AGG is 0.01 percentage points lower than VMBS’s (0.04% vs. 0.05%). AGG is mostly comprised of AAA bonds and VMBS has a high exposure to AAA bond. Overall, AGG has provided higher returns than VMBS over the past ten years.

In this article, we’ll compare AGG vs. VMBS. We’ll look at industry exposure and annual returns, as well as at their portfolio growth and performance. Moreover, I’ll also discuss AGG’s and VMBS’s holdings, fund composition, and risk metrics and examine how these affect their overall returns.

Summary

AGG VMBS
Name iShares Core U.S. Aggregate Bond ETF Vanguard Mortgage-Backed Securities Index Fund ETF Shares
Category Intermediate-Term Bond Intermediate Government
Issuer iShares Vanguard
AUM 88.8B 16.61B
Avg. Return 4.04% 2.89%
Div. Yield 1.95% 1.23%
Expense Ratio 0.04% 0.05%

The iShares Core U.S. Aggregate Bond ETF (AGG) is a Intermediate-Term Bond fund that is issued by iShares. It currently has 88.8B total assets under management and has yielded an average annual return of 4.04% over the past 10 years. The fund has a dividend yield of 1.95% with an expense ratio of 0.04%.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) is a Intermediate Government fund that is issued by Vanguard. It currently has 16.61B total assets under management and has yielded an average annual return of 2.89% over the past 10 years. The fund has a dividend yield of 1.23% with an expense ratio of 0.05%.

AGG’s dividend yield is 0.72% higher than that of VMBS (1.95% vs. 1.23%). Also, AGG yielded on average 1.15% more per year over the past decade (4.04% vs. 2.89%). The expense ratio of AGG is 0.01 percentage points lower than VMBS’s (0.04% vs. 0.05%).

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Fund Composition

Holdings

AGG - Holdings

AGG Bond Sectors Weight
AAA 68.92%
BBB 15.38%
A 11.16%
AA 2.92%
Others 1.63%
Below B 0.0%
B 0.0%
BB 0.0%
US Government 0.0%

AGG’s Top Bond Sectors are ratings of AAA, BBB, A, AA, and Others at 68.92%, 15.38%, 11.16%, 2.92%, and 1.63%. The fund is less weighted towards Below B (0.0%), B (0.0%), and BB (0.0%) rated bonds.

VMBS - Holdings

VMBS Bond Sectors Weight
AAA 100.01%
Below B 0.0%
B 0.0%
BB 0.0%
BBB 0.0%
A 0.0%
AA 0.0%
US Government 0.0%
Others -0.01%

VMBS’s Top Bond Sectors are ratings of AAA, Below B, B, BB, and BBB at 100.01%, 0.0%, 0.0%, 0.0%, and 0.0%. The fund is less weighted towards A (0.0%), AA (0.0%), and US Government (0.0%) rated bonds.

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Risk Analysis

AGG VMBS
Mean Return 0.28 0.21
R-squared 99.96 65.78
Std. Deviation 3.03 2.02
Alpha -0.08 0.37
Beta 1.01 0.54
Sharpe Ratio 0.9 0.94
Treynor Ratio 2.7 3.47

The iShares Core U.S. Aggregate Bond ETF (AGG) has a Beta of 1.01 with a R-squared of 99.96 and a Treynor Ratio of 2.7. Its Standard Deviation is 3.03 while AGG’s Alpha is -0.08. Furthermore, the fund has a Mean Return of 0.28 and a Sharpe Ratio of 0.9.

The Vanguard Mortgage-Backed Securities Index Fund ETF Shares (VMBS) has a R-squared of 65.78 with a Alpha of 0.37 and a Standard Deviation of 2.02. Its Treynor Ratio is 3.47 while VMBS’s Mean Return is 0.21. Furthermore, the fund has a Beta of 0.54 and a Sharpe Ratio of 0.94.

AGG’s Mean Return is 0.07 points higher than that of VMBS and its R-squared is 34.18 points higher. With a Standard Deviation of 3.03, AGG is slightly more volatile than VMBS. The Alpha and Beta of AGG are 0.45 points lower and 0.47 points higher than VMBS’s Alpha and Beta.

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Performance

Annual Returns

AGG vs. VMBS - Annual Returns

Year AGG VMBS
2020 7.42% 3.77%
2019 8.68% 6.17%
2018 -0.05% 0.87%
2017 3.53% 2.37%
2016 2.56% 1.43%
2015 0.48% 1.43%
2014 6.04% 5.81%
2013 -2.15% -1.28%
2012 4.04% 2.47%
2011 7.58% 5.89%
2010 6.3% 5.24%

AGG had its best year in 2019 with an annual return of 8.68%. AGG’s worst year over the past decade yielded -2.15% and occurred in 2013. In most years the iShares Core U.S. Aggregate Bond ETF provided moderate returns such as in 2017, 2012, and 2014 where annual returns amounted to 3.53%, 4.04%, and 6.04% respectively.

The year 2019 was the strongest year for VMBS, returning 6.17% on an annual basis. The poorest year for VMBS in the last ten years was 2013, with a yield of -1.28%. Most years the Vanguard Mortgage-Backed Securities Index Fund ETF Shares has given investors modest returns, such as in 2017, 2012, and 2020, when gains were 2.37%, 2.47%, and 3.77% respectively.

Portfolio Growth

AGG vs. VMBS - Portfolio Growth

Fund Initial Balance Final Balance CAGR
AGG $10,000 $14,457 4.04%
VMBS $10,000 $13,265 2.89%

A $10,000 investment in AGG would have resulted in a final balance of $14,457. This is a profit of $4,457 over 10 years and amounts to a compound annual growth rate (CAGR) of 4.04%.

With a $10,000 investment in VMBS, the end total would have been $13,265. This equates to a $3,265 profit over 10 years and a compound annual growth rate (CAGR) of 2.89%.

AGG’s CAGR is 1.15 percentage points higher than that of VMBS and as a result, would have yielded $1,192 more on a $10,000 investment. Thus, AGG outperformed VMBS by 1.15% annually.


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