Consequently, bond ETFs may only represent a fraction of the overall bond market they seek to track. Moreover, this may lead to tracking errors, or deviations between the bond ETF’s performance and that of the underlying index.
The popularly monitored Barclays U.S. Aggregate index may not be the best benchmark for most long-term fixed-income investors, as the index has a heavy weighting toward U.S. government bonds, which are subject to interest rate risks – as interest rates rise from their historic lows, the bond prices will fall.
“In a rising-rate environment, those government bonds are the riskiest,” Rich Wiggins, a senior consultant at Summit Strategies Group, said in the article.
For more information on ETF indexing, visit our indexing category.
Max Chen contributed to this article.