Shifting Bond Exposures

September 18, 2019

Quick question: For bond exposure, is it best to invest in an ETF that tracks the Bloomberg Barclays U.S. Aggregate Bond Index or to buy different ETFs that track different segments of the broad bond index (and, potentially, over- or underweight them according to existing market forces)?

This was a topic of much debate at a panel during the Wealth/Stack conference earlier in September (at which CFRA was a featured presenter alongside Dave Nadig of and others). Fellow panelists highlighted how active managers have had success outperforming the popular bond index (much more so than active equity managers succeed in outperforming the broad equity market indices).

Indeed, the 10-year annualized total return for the average Lipper core bond fund of 4.6% as of August 2019 was higher than the index’s 3.9%. However, at the conference, we spent little time discussing how the exposure the “AGG” provides has shifted in the past decade.

Rising Risk

Yet understanding what’s inside the index (and any ETFs that track it) is crucially important. Indeed, when reviewing bond funds, CFRA believes investors should assess the interest rate risk, as measured in years by duration, and credit risk they incur. These risk factors are offset by the fund’s yield.

At the end of 2008, the index then known as the Barclays U.S. Aggregate Bond Index had average duration of 3.7 years and had a 7% weighting in credit rated BBB, the lowest possible ratings level for the investment-grade-focused benchmark.

Fast-forward to June 2019: The duration for the index had extended by more than 50% to 5.7 years, and the weighting in BBB bonds rose to 14%. Despite this elevated risk, the yield the index provided decreased to 2.5% from 4.0%.


How Has the AGG’s Risk/Return Profile Shifted?

Source: PIMCO


For a larger view, please click on the image above.

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