The benchmark Barclays U.S. Aggregate Bond Index provides a blueprint for many fixed-income portfolios, but it does not include many popular debt investments. Nevertheless, there are a number of exchange traded fund options to help fill in the gaps.
The iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG), which tracks the Barclays US Aggregate Bond Index, is a popular core fixed-income play, providing exposure to a broad range of U.S. listed fixed-rate investment-grade bonds that covers U.S. government, agency, corporate, and securitized bonds. [Aggregate Bond ETFs to Establish a Fixed-Income Portfolio’s Core]
“However, many active managers in the intermediate-term bond Morningstar Category invest in high-yield bonds and foreign debt to achieve extra yield or better total returns,” according to Tom Boccellari, manager research analyst at Morningstar.
Consequently, bond investors seeking a broader portfolio of debt securities that includes investment-grade, high-yield, and U.S.-dollar-denominated foreign bonds may look at the iShares Core Total USD Bond Market ETF (NYSEArca: IUSB), tries to reflect the performance of the Barclays U.S. Universal Bond Index. [A Broader U.S. Bond Index ETF]
Along with its exposure to all the constituents in the Aggregate Index, IUSB also includes high-yield corporate, eurodollar, U.S.-dollar-denominated emerging-markets, 144A securities, and a number of commercial mortgage-backed bonds that are excluded from the benchmark Aggregate Index.
“Historically, the inclusion of riskier assets, such as high-yield bonds, has provided greater yield and better risk-adjusted returns than funds that track the Aggregate Index,” Boccellari added. “However, investors should note that this fund may underperform during turbulent markets because of its increased credit risk.”
Specifically, IUSB includes a 10% smaller tilt toward triple-A-rated debt securities, compared to AGG. Additionally, the Core Total USD Bond ETF also includes speculative-grade BB, B and CCC rated bonds.
IUSB also has a slightly higher expense ratio of 0.15%, compared to AGG. Investors, though, may find a higher 1.96% 30-day SEC yield in IUSB, compared to AGG’s 1.85% 30-day SEC yield.
For a more all-inclusive bond investment portfolio, investors would still need to supplement their position with municipal bonds and Treasury inflation-protected securities, which are not included in either IUSB or the Aggregate Index.
For munis exposure, there are a number options, including the iShares National AMT-Free Muni Bond ETF (NYSEArca: MUB), SPDR Nuveen Barclays Municipal Bond ETF (NYSEArca: TFI) and Market Vectors Intermediate Municipal Index ETF (NYSEArca: ITM).
Additionally, investors can take a look at TIPS ETFs, such the iShares TIPS Bond ETF (NYSEArca: TIP), Schwab U.S. TIPS (NYSEArca: SCHP) and SPDR Barclays TIPS ETF (NYSEArca: IPE) to limit the negative effects of rising inflation on real returns. [Big Bets Made on big TIPS ETF]
For more information on fixed-income strategies, visit our bond ETFs category.
Max Chen contributed to this article.