AGZ: iShares Agency Bond ETF

AGZ: iShares Agency Bond ETF

The iShares Agency Bond ETF (NYSEARCA: AGZ) is an exchange-traded fund (ETF) issued by BlackRock iShares on Nov. 5, 2008 on the New York Stock Exchange Arca. The fund seeks to track the investment results, before fees and expenses, of the Barclays U.S. Agency Bond Index. This index is composed of agency securities issued by U.S. government agencies, as well as non-U.S. and corporate debt guaranteed by the U.S. government.

The iShares Agency Bond ETF is the only ETF tracking the agency sector of the U.S. government bond market. AGZ seeks to provide investment results corresponding to its benchmark index by allocating its portfolio in securities comprised in the index. The fund holds bonds or debentures issued by U.S. government and U.S. government-related agencies, such as the Federal National Mortgage Association, or Fannie Mae; the Federal Home Loan Mortgage Corporation, or Freddie Mac; and Federal Home Loan Banks.

As of Aug. 13, 2015, AGZ allocates its portfolio to various sectors of the agency securities market, such as 60.93% owned no guarantee; 32.75% government sponsored; 5.58% government guaranteed; 0.72% cash and derivatives; and 0.02% financial other.

Characteristics

The iShares Agency Bond ETF is legally structured as an open-ended investment company advised by BlackRock Fund Advisors. BlackRock Fund Advisors implements a passive, or indexing, strategy to achieve the fund's investment goal. The fund generally invests at least 90% of its assets in component securities included in the Barclays U.S. Agency Bond Index, its benchmark index.

AGZ has a trailing 12-month yield of 1.3%, a distribution yield of 1.27% and a 30-day SEC yield of 1.15%. Investors would theoretically earn an annual yield of 1.27% if the most recent fund distribution and the fund's price remain unchanged. The fund has an effective duration of 3.4 years and a weighted average coupon rate of 1.81%. AGZ has an expense ratio of 0.20%, while the average expense ratio of its category of intermediate government bonds is 0.18%.Suitability and Recommendations

As with any investment, potential investors should understand the risks inherent to the iShares Agency Bond ETF. The principal risks associated with AGZ include asset class risk, call risk, extension risk, income risk, government debt risk, interest rate risk, liquidity risk, securities lending risk, market risk, U.S. agency debt risk and U.S. government issuers risk.

As of July 31, 2015, AGZ has generated an average annual market price return of 3.13%, while the Barclays U.S. Agency Bond Index generated an average annual return of 3.21%. This discrepancy between returns is due to AGZ's tracking error.

Based on trailing five-year data, AGZ had an alpha, against the Barclays US Aggregate Bond TR USD, the standard index, of -0.12; a beta, against the standard index, of 0.62; a Sharpe ratio of 1.03; and a Treynor ratio of 3.01.

Based on modern portfolio theory (MPT), AGZ's alpha indicates it underperformed the index by an annualized 0.12%. The fund's beta indicates it has moderate correlation to the standard index and may be less volatile than the market; therefore, the fund may carry less risk. AGZ's Sharpe ratio indicates it was able to provide satisfactory returns to investors on a risk-adjusted basis during this period. Its Treynor ratio indicates it generated an annualized 3.01% per unit of risk on a risk-adjusted basis.

In terms of MPT, AGZ carries a low-level risk and has the potential to generate above-average returns. The fund is best-suited for risk-averse, intermediate-term, fixed-income investors interested in allocating a portion of their portfolio into U.S. agency securities while receiving a yield. AGZ is also suitable for investors seeking to diversify their U.S. equity portfolios with potentially low-risk U.S. agency securities. Since AGZ is heavily weighted toward agency securities that are partially or wholly owned by the U.S. government, but do not guarantee repayment, it may not be suitable for investors who fear U.S. government agencies may default on their debts.