Comparing AGG vs IEI: Why Lower Expense Ratio as a Fraction Matters for Bond Fund Investors

When choosing between bond ETFs, a seemingly small difference in costs can compound significantly over time. The iShares Core US Aggregate Bond ETF (AGG) and the iShares 3-7 Year Treasury Bond ETF (IEI) represent two distinct philosophies in fixed-income investing: one prioritizes comprehensive market exposure with lower fees, while the other focuses on a specific Treasury segment. Understanding how these differences play out is essential for any investor evaluating where to allocate capital in the bond market.

Cost Efficiency: Understanding the Fraction That Separates AGG from IEI

The expense ratio difference between AGG and IEI illustrates why small fractions matter in investing. AGG charges just 0.03% annually, while IEI costs 0.15%—making AGG’s fee structure only one-fifth as expensive. For a $100,000 investment, this translates to just $30 per year in fees for AGG compared to $150 for IEI. Over decades, this seemingly minor distinction compounds into substantial savings.

AGG’s competitive pricing extends to its yield as well. As of January 9, 2026, AGG offered a 3.9% dividend yield against IEI’s 3.5%. This combination—lower costs plus higher income generation—creates a compelling proposition for income-focused investors seeking efficiency. The broad $136.5 billion in assets under management supports AGG’s operational economy, while IEI manages $17.7 billion, reflecting the different investor bases each fund attracts.

Diversification Trade-offs: 13,000 Holdings vs. 84 Treasury Bonds

The structural difference between these funds reveals a fundamental choice: breadth versus focus. AGG encompasses the entire U.S. investment-grade bond market with over 13,000 securities as of its 22-year history. This approach means exposure to government bonds, corporate debt, mortgage-backed securities, and other fixed-income instruments, capturing the full spectrum of U.S. debt markets.

IEI, by contrast, maintains surgical precision with exactly 84 holdings, all intermediate-term U.S. Treasury bonds. Its largest positions include Treasury Notes maturing on February 15, 2029 (4.08%), November 30, 2030 (3.60%), and May 15, 2029 (2.93%). This narrow focus eliminates corporate and mortgage risk entirely, appealing to investors who want pure government bond exposure.

AGG’s extensive holdings include Treasury securities plus private sector debt. Its top positions show this mix: BlackRock represents 2.66% of the portfolio (reflecting corporate exposure), while Treasury Notes maturing February 2, 2035 constitute 0.42%. This diversification reduces the impact of any single issuer’s problems, but it also creates a subtle risk: AGG’s weighting system gives proportionally higher influence to the largest debt issuers, potentially concentrating exposure to entities you might not deliberately choose.

Five-Year Performance: Returns and Drawdown Analysis

Historical performance reveals how these strategies weathered recent market conditions. From a risk perspective, AGG experienced a steeper decline, with a maximum drawdown of -17.83% over the past five years. IEI’s drawdown reached -14.05%, reflecting Treasury bonds’ relatively greater stability compared to a mixed fixed-income portfolio.

When converted to actual dollar returns, the picture becomes more nuanced. An investor who placed $1,000 into IEI five years ago would hold $903 today—a 9.7% loss. The same $1,000 invested in AGG would have declined to $857, representing a 14.3% loss. These depressing figures reflect the challenging environment for bond investors since 2021, when rates began rising and bond prices fell accordingly.

The real story emerges when including dividend reinvestment. Investors who bought IEI in early 2021 and reinvested all dividends realized a modest 0.96% cumulative gain. AGG investors under the same conditions experienced a -0.7% decline. Neither performance inspires confidence, but both illustrate why bond investors today must consider not just historical returns but the structural changes in the interest rate environment.

Choosing Between Breadth and Focus: Which ETF Fits Your Strategy?

For investors seeking a stable parking place for capital, both AGG and IEI offer straightforward U.S. bond exposure without complexities like leverage or currency hedging. However, they serve distinctly different investment strategies.

Choose AGG if you want maximum diversification across the entire investment-grade bond universe while minimizing costs. The 0.03 expense ratio as a fraction of your assets means more money stays invested rather than flowing to fund managers. This approach makes sense for buy-and-hold investors comfortable with moderate credit risk and seeking the broadest possible market representation.

Choose IEI if you specifically want intermediate-term Treasury exposure with minimal credit risk. The higher expense ratio reflects the specialized nature of this fund, and the focused Treasury portfolio may better suit conservative portfolios or investors with specific maturity preferences.

The Interest Rate Factor

Both funds’ future performance hinges largely on Federal Reserve policy. If the central bank lowers interest rates from current levels, bond prices should appreciate, transforming the disappointing historical returns into positive territory. This dynamic suggests that timing and outlook matter more than which fund you select—the broader bond market environment will likely overwhelm fund-specific factors.

The choice between AGG and IEI ultimately reflects your tolerance for diversification and your pricing sensitivity. AGG’s expense ratio as a fraction of typical fund costs makes it particularly attractive for cost-conscious investors, while IEI’s Treasury-only approach appeals to those seeking clarity and credit-risk elimination.