The “Three Fund” Portfolio Part 3 – Bonds

Having examined stock selection in Part 1 and Part 2, let’s turn our attention to bonds.

The leading Total Bond Market ETFs are Vanguard’s BND and iShares’ AGG. There’s little room to optimize here as it really doesn’t matter which one you choose. When I run these ETFs in balanced portfolios using VTI/VEU and DGRO/DNL, I see a tiny performance improvement with AGG.

Here is a balanced model using 40% bonds, 45% DGRO and 15% DNL from July 2014 to May 2020. Portfolio 1 contains AGG while Portfolio 2 contains BND.

Likewise, here is 40% bonds, 45% VTI and 15% VEU from May 2007 to May 2020, with AGG in Portfolio 1 and BND in Portfolio 2:

In addition, AGG seems to enjoy a slight tax cost advantage to BND. See Part 5 of this series.

For these reasons, I have chose to use AGG over BND. For those who prefer mutual funds, FXNAX tracks the same index as AGG with slightly less fees and may perform a hair better over time. YMMV.

In Part 4, I will look at allocating among the three asset classes.

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