Market Analysis2025-11-14
Stabilize Your Bond Portfolio with AGG ETF: Core Asset Allocation Strategy
AGG tracks the entire U.S. investment-grade bond market with an expense ratio of 0.03% and a duration of 6 years, making it the cornerstone asset of any bond portfolio. Its negative correlation with equities reduces volatility and delivers stable dividend income, making it essential for all investors.
AdminCNBC
AGG (iShares Core U.S. Aggregate Bond ETF) is the ETF that represents the entire U.S. investment-grade bond market. It provides diversified exposure to 11,245 securities—including Treasuries, corporate bonds, and MBS—serving as the core asset of any bond portfolio. Its expense ratio of 0.03% is among the lowest in the bond ETF universe, its dividend yield of 3.12% provides stable income, and its average duration of 6 years offers moderate sensitivity to interest rate movements, making it well-suited for long-term investing. Year-to-date in 2025, AGG has returned +2.8%, well behind equities (S&P 500 +23.5%), but it plays a defensive role during equity drawdowns and reduces overall portfolio volatility. Using a rebalancing calculator to maintain target allocations between equities and AGG, and an asset allocation calculator to design the right AGG weighting based on your age and risk tolerance, is the key to stable long-term returns.
AGG's Composition and Its Role as a Broad Bond Market Representative
AGG tracks the Bloomberg U.S. Aggregate Bond Index, covering the entire U.S. investment-grade bond market. Its holdings by bond type break down as follows: U.S. Treasuries at 42% consist of maturities ranging from 1 to 30 years, representing safe-haven assets that are sensitive to interest rate changes; MBS (Mortgage-Backed Securities) at 26% are government-guaranteed mortgage bonds that offer higher yields than Treasuries; corporate bonds at 23% are investment-grade (BBB or above) bonds from high-quality companies that add credit spread returns; and agency bonds at 9% are issued by quasi-government agencies such as Fannie Mae and Freddie Mac, offering safety comparable to Treasuries. With a total of 11,245 bonds, the fund is extremely diversified, leaving individual bond default risk near zero. The average credit quality is AA—among the highest in the investment-grade universe—and the average maturity of 8.7 years with a duration of 6 years gives it an intermediate-bond character. An average coupon rate of 3.2% provides stable dividend income. In terms of sector diversification, Treasuries strengthen during rate declines and see safe-haven demand rise during recessions; MBS holds up well in stable housing markets but carries prepayment risk when rates fall; and corporate bonds can deliver excess returns through credit spread compression during economic expansions. This sector mix delivers consistent performance across the entire economic cycle. On costs and efficiency, the 0.03% expense ratio means only ₩3,000 in annual fees on a ₩10 million investment—extremely low. Dividend reinvestment maximizes compounding returns. The ETF structure is tax-efficient, minimizing taxes on internal transactions even though bond interest is subject to a 15.4% interest income tax. Liquidity is excellent, with average daily volume of 5 million shares and very tight bid-ask spreads that keep transaction costs low.
AGG vs. TLT vs. IEF: Bond ETF Comparison
In terms of duration and interest rate sensitivity: AGG, with a duration of 6 years, falls approximately -6% in price for every 1% rise in rates—a neutral profile. TLT, with a duration of 17 years, falls approximately -17% for every 1% rate increase—a high-risk profile. IEF, with a duration of 7.5 years, falls approximately -7.5% per 1% rate increase—similar to AGG but slightly higher. Regarding volatility: AGG has annual volatility of 5–8%, making it the most stable; TLT has annual volatility of 15–20%, on par with equities; and IEF has annual volatility of 8–12%, placing it in the middle. For dividend yield: AGG at 3.12% is at a moderate, stable level; TLT at 3.31% carries a slight long-duration premium; and IEF at 3.03% is comparable to AGG. In terms of bond composition: AGG blends Treasuries, MBS, and corporate bonds for maximum diversification; TLT holds only 20+ year long-term Treasuries, concentrating in a single maturity; and IEF holds only 7–10 year intermediate Treasuries, concentrating in a middle maturity. Suitable investors: AGG is appropriate for all investors seeking a core bond portfolio asset, those who prioritize stability above all else, and bond beginners. TLT suits aggressive investors making a bet on falling rates and those holding a small position as a hedge against equity drawdowns. IEF suits investors who prefer pure Treasury exposure or those wanting a middle-ground risk level between AGG and TLT. Example portfolio allocations: Conservative (AGG 60%, TLT 10%, equities 30%)—maximizes stability. Balanced (AGG 40%, IEF 10%, equities 50%)—balances growth and stability. Aggressive (AGG 20%, TLT 5%, equities 70%, alternatives 5%)—prioritizes growth while maintaining minimum bond exposure.
Equity–AGG Correlation and the Rebalancing Effect
Regarding the negative correlation between equities and bonds: the correlation coefficient between the S&P 500 and AGG is approximately -0.3, meaning bonds tend to rise when equities fall, which is effective for stabilizing a portfolio. While this relationship fluctuates with the interest rate environment, it provides diversification benefits over the long term. In extreme market crises (e.g., the 2020 COVID crash), all assets can fall together, but bonds typically recover faster. Rebalancing effect simulation—Scenario 1, Bull Market (2025 actual results): Starting with a 60% equity (SPY) / 40% AGG allocation, after SPY gains +23.5% and AGG gains +2.8%, the year-end weighting drifts to equities 67.2% / AGG 32.8%. Rebalancing restores 60:40 by selling 7.2 percentage points of equities and buying 7.2 percentage points of AGG. The effect: profit-taking by selling some equities near the high to lock in gains, buying AGG at a lower level to position for future returns if rates decline, and reducing excess equity exposure to prepare for a potential correction. Scenario 2, Bear Market: With equities returning -15% and AGG returning +8% (on a sharp rate decline), year-end weighting drifts to equities 52.6% / AGG 47.4%. Rebalancing restores 60:40 by buying 7.4 percentage points of equities and selling 7.4 percentage points of AGG. The effect: buying equities at a low price for strong gains on recovery, selling AGG at a high to realize the benefit of falling rates, and automatically increasing equity exposure during a downturn to maximize long-term returns. Rebalancing frequency strategies: Annual (year-end) minimizes transaction costs, simplifies tax planning, and suits most investors. Semi-annual is effective in highly volatile markets, correcting allocation drift more quickly. Quarterly suits more actively managed portfolios but increases transaction costs. Band rebalancing (trigger at ±5 percentage point drift) uses mechanical rules to eliminate emotion and only corrects significant deviations, making it highly efficient.
Adjusting AGG Allocation with a Rebalancing Calculator
Review your current portfolio and adjust your AGG weighting. Example situation: Total assets of ₩80 million consisting of SPY ₩52 million (65%), QQQ ₩8 million (10%), AGG ₩20 million (25%). Target allocation is equities (SPY+QQQ) 60% / AGG 40%, but current allocations are equities 75% / AGG 25%—a drift of equities +15 percentage points and AGG -15 percentage points. Rebalancing calculator inputs: total assets ₩80 million, target equity weight 60% (₩48 million), current equity weight 75% (₩60 million), target AGG weight 40% (₩32 million), current AGG weight 25% (₩20 million). Calculated result: sell ₩12 million of equities (₩60M − ₩48M) and buy ₩12 million of AGG (₩32M − ₩20M). Detailed action steps: sell ₩10 million of SPY (₩52M → ₩42M, 52.5%), sell ₩2 million of QQQ (₩8M → ₩6M, 7.5%), buy ₩12 million of AGG (₩20M → ₩32M, 40%). New portfolio: SPY ₩42M (52.5%), QQQ ₩6M (7.5%), AGG ₩32M (40%)—achieving the target of 60% equities and 40% AGG. Expected effects: if rates rise 1%, losses under the old 25% AGG allocation would be -1.5% (6% × 0.25), compared to -2.4% (6% × 0.40) with the new 40% AGG allocation, but the reduction in equity risk offsets this. On a 10% equity correction, the old 75% equity allocation would produce a -7.5% loss, while the new 60% equity allocation produces a -6.0% loss—a defense of 1.5 percentage points. Annual dividend yield improves from the old [SPY 1.26% × 0.65 + QQQ 0.53% × 0.10 + AGG 3.12% × 0.25 = 1.68%] to the new [SPY 1.26% × 0.525 + QQQ 0.53% × 0.075 + AGG 3.12% × 0.40 = 1.95%]. Transaction costs: buy/sell commissions total roughly ₩12M × 0.5% = ₩60,000, plus currency conversion fees, for a total of approximately ₩100,000—extremely low relative to the rebalancing benefit.
Designing the Optimal AGG Allocation with an Asset Allocation Calculator
Design your AGG allocation based on age and investment goals. Recommended allocations by age: investors in their 20s–30s should hold 15–25% in AGG, prioritizing growth while maintaining a minimum allocation to stable assets (example: equities 70%, AGG 20%, alternatives 10%); investors in their 40s should hold 30–40% in AGG, balancing growth and stability (example: equities 55%, AGG 35%, alternatives 10%); investors in their 50s should hold 40–50% in AGG, increasing stability in preparation for retirement (example: equities 45%, AGG 45%, cash 10%); and investors aged 60 and above should hold 50–60% in AGG, prioritizing capital preservation (example: equities 25%, AGG 60%, cash 15%). Allocations by investment goal: aggressive growth (targeting 12%+ annually) calls for 15–20% in AGG—just enough for minimum stability with an equity-heavy construction; balanced growth (targeting 8–10% annually) calls for 30–40% in AGG, balancing growth and stability while controlling volatility; stable income (targeting 5–7% annually) calls for 50–60% in AGG, centering on dividend and interest income with capital preservation as the priority; and retirement drawdown (targeting 4% annual withdrawal) calls for 60–70% in AGG to ensure adequate cash flow for withdrawals and minimize market volatility. Asset allocation calculator example: for a 48-year-old investor with 12 years to retirement, a target annual return of 8%, and a medium risk tolerance, the recommended allocation is SPY 30%, SCHD 15%, QQQ 10%, AGG 35%, IEF 5%, VNQ 5%. AGG at 35% serves as the bond core, while the additional 5% in IEF diversifies duration. The projected annual return is 8.3% with volatility of 11.5%, making the goal achievable. Maximum drawdown (95% confidence interval) is -15.2%, within a tolerable range. Rebalancing rules: adjust when AGG drifts ±5 percentage points from target (if target is 35%, maintain the 30–40% range); conduct an annual review to increase AGG weighting as you age or as goals change (e.g., increase from 35% to 45% upon entering your 50s); and rebalance immediately during sharp market moves (equities ±15% or more) to capture opportunities and manage risk.
Conclusion
With an expense ratio of 0.03% and a duration of 6 years, AGG is the ideal core asset for any bond portfolio. Its negative correlation with equities reduces portfolio volatility while its stable 3.12% dividend yield makes it essential for investors of all ages. Use a rebalancing calculator to trim excess equity exposure into AGG during bull markets, and use an asset allocation calculator to size your AGG allocation—anywhere from 15% to 60%—according to your age and goals, securing stable long-term returns.
Related Portfolios
#AGG ETF#[KO] 리밸런싱 계산기#[KO] 자산배분 계산기#[KO] 채권 투자#[KO] 코어 자산#[KO] 포트폴리오 안정화
Related Articles
Have any questions?