Aggregate Bond ETFs to Establish a Fixed-Income Portfolio's Core | ETF Trends

Investors who want to build a fixed-income portfolio can lay a solid core foundation with a high-quality and broad mix of debt assets through an aggregate bond index-based exchange traded funds.

For example, the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) is one of the largest, cheapest and most liquid investment that tracks the widely observed Barclays US Aggregate Bond Index, writes Thomas Boccellari, a passive strategies analyst for Morningstar.

AGG’s underlying index includes a broad mix of fixed-rate, investment-grade government, corporate and securitized bonds that are weighted by float-adjusted market capitalization. Consequently, the portfolio tilts towards issuers with the largest debt, so the government and securitized bonds make up the largest chunk of the aggregate bond ETF’s holdings.

Specifically, AGG has 38.0% Treasuries, 27.6% MBS pass-through securities, 14.1% industrials, 7.6% financials, 4.3% agency bonds and 1.8% utilities.

“This gives the fund a high-quality portfolio,” Boccellari said. “The average credit rating of its holdings is A, which is higher than its average intermediate-term bond peer’s (BBB). While that may help the fund hold up better when equities or lower-quality bonds sell off, it can also result in lower expected returns amid credit rallies or risk-seeking environments.”

The iShares Aggregate Bond ETF comes with a 5.06 year duration and a 1.79% 30-day SEC yield. Additionally, the fund has a cheap 0.08% expense ratio.

The aggregate bond index fund has outperformed the average actively managed intermediate-bond fund over the past decade, with a better risk-adjusted return. It goes to show that it is difficult for active managers to beat the benchmark index net of fees without being exposed to greater credit or interest-rate risks.