Fixed-Income ETF Price Wars

NEW YORK ( TheStreet) -- During the opening days of December, the Vanguard Total Bond Market ETF ( BND) managed to squeak past the iShares Barclays Aggregate Bond Fund ( AGG) to become the largest broad-based bond ETF and third largest fixed income ETF by assets.

In an interesting and exciting development, AGG has become the latest victim in the ongoing ETF price war.

According to Morningstar, as of last Friday, BND and AGG boasted assets totaling $13.9 billion and $13.8 billion, respectively.

The showdown between AGG and BND has been years in the making. Launched during the latter half of 2003, AGG quickly became a staple within the fixed income ETF universe. Much of this popularity can be attributed to the fund's first-mover status.

Forbes notes that, by the time Vanguard's competing fund first came onto the scene in early 2007, the veteran product had already managed to amass $6 billion in assets.

AGG's advantage heading into the showdown was staggering. However, as we have seen, it was no match to Vanguard's low-cost approach. In what has become a signature move, the Pennsylvania-based firm opted to take an axe to expenses in order appeal to cost conscious investors. By charging investors 0.11% for BND, the firm undercut AGG by half.

This adjustment has made all the difference. As evidenced by the monthly fund flow data compiled by the National Stock Exchange, BND's rise to dominance is not surprising. Throughout 2011, the Vanguard fund has managed to consistently and substantially surpass AGG in inflows. Year to date, heading into the final month of the year, the fund had welcomed slightly over $4.4 billion compared to $2.2 billion for AGG..

This story mimics other notable price war showdowns pitting iShares against Vanguard. Perhaps the most closely monitored is the MSCI Emerging Markets Index Fund ( EEM) vs. Vanguard Emerging Markets ETF ( VWO). Despite being nearly two years its senior, EEM was surpassed by VWO in terms of assets. Both funds are designed to mimic the performance of the MSCI Emerging Market Index. However, with a 0.22% expense ratio, VWO is the substantially cheaper of the two options.

iShares is not always the loser in these price battles, though. On the contrary, the fund company has taken a page out of Vanguard's book in recent years in hopes of attracting assets to its physically-backed gold ETF instrument. The iShares Gold Trust ( IAU) has gathered a respectable following, with over $9 billion in total assets. However, it remains dwarfed by the premier SPDR Gold Shares ( GLD). By slashing its expense ratio, the fund has managed to gain some ground, however. Year to date, IAU has welcomed over $2.7 billion. GLD, meanwhile, has seen less than $1.9 billion in net inflows.

Despite the fact that AGG has been usurped by Vanguard's BND, Blackrock's ( BLK) iShares product line maintains a solid presence in the realm of fixed-income ETFs. The iShares Barclays TIPS Bond Fund ( TIP) and the iShares iBoxx $ Investment Grade Corporate Bond Fund ( LQD) both sit comfortably at the top of the list, with $21.8 billion and $16.5 billion in total assets respectively.

As investors prepare for the end of the year, many of the same factors that have threatened the strength and stability of the global markets in recent months remain in play. Given these hurdles, fixed income ETFs will likely prove to be popular destinations for investors of all risk-tolerances. Although BND is currently leading AGG in terms of assets, both products are attractive options for individuals looking to build a strong shield against market volatility.

Written by Don Dion in Williamstown, Mass.


At the time of publication, Dion Money Management owned iShares Gold Trust and iShares Barclays TIPS Bond Fund.