“Owning a fund that tracks the Universal Index can limit the costs of rebalancing other bond fund holdings to ensure that no individual sector weighting becomes too big relative to other sectors,” Boccellari added.
Additionally, due to its exposure to higher-yielding assets, IUSB comes with a slightly higher 2.08% 30-day SEC yield, compared to AGG’s 1.77% 30-day SEC yield. Both funds also come with similar durations – IUSB has a 5.09 year duration and AGG has a 5.2 year duration.
Due to its greater tilt toward riskier assets, IUSB can underperform AGG during periods of market stress. During the slowdown and corporate bond problems in the late 1990s and early 2000s, the Universal Index underperformed the Aggregate Index. The Universal Index also lagged behind its subindex during the 2008 financial crisis. Nevertheless, both indices generated positive returns during volatile markets, and the Universal Index has shown historically better risk-adjusted returns across various market cycles.
However, fixed-income investors would still have to supplement their portfolios with tax-exempt municipal bonds and Treasury inflation-protected securities, which are both excluded from the Universal and Aggregate Indices. [Muni ETFs Are a Good Alternative in Low-Yield Environment]
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.