Why Similar Bond ETFs Can Show Different Tracking Error

Summary

This exchange addresses a reported annualized tracking error between Vanguard’s BND bond ETF and the Bloomberg U.S. Aggregate index over a ten-year monthly-return sample. The question treats the measured difference as evidence that passive bond investing may be unreliable. The answer points to a key comparison issue: BND tracks the Bloomberg U.S. Aggregate Float Adjusted Index, while the AGG ETF tracks the Bloomberg U.S. Aggregate Bond Index. Although the benchmarks are similar, they are not identical, so return differences between the fund and the selected index need not represent tracking slippage against BND’s own benchmark.

The exchange gives no independent calculation, index return data, or decomposition of the reported tracking error. It therefore identifies a plausible benchmark mismatch but does not verify the reported figure or establish how much of it comes from index construction, sampling, fees, or other sources. A meaningful evaluation should compare a fund with its stated target index over the same dates and return convention; the brief answer does not perform that analysis.

Key ideas

• Tracking error depends on the benchmark chosen for comparison.
• BND and AGG reference similar but different Bloomberg U.S. Aggregate indexes.
• A return difference from a similar index does not by itself establish poor tracking of a fund’s actual benchmark.
• The exchange does not verify the reported tracking error or quantify its causes.
• Fund tracking should be assessed against its stated benchmark using aligned return data.

Tags

# Tracking Error Vanguard BND ETF


# Tracking Error Vanguard BND ETF












I am taking BND ETF total returns and Agg total returns, monthly over 10 years ending 12/31/2024, and calculating the annualized tracking error. What I get blows me away: 57bp of tracking error over the time period. That is extremely high for a passive bond fund. Sure enough, vanguard does not list BND tracking error on their website.

Is anyone else seeing 50-60bp of tracking error for BND? If so, passive bond investing is a total scam.

## Answer by pyCthon (score 2)

https://quant.stackexchange.com/a/82147

They don't track the same index, albeit the indexes are similar.

BND tracks the Bloomberg U.S. Aggregate Float Adjusted Index

While AGG tracks the Bloomberg U.S. Aggregate Bond Index

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.