Fixed income ETFs on a torrid asset-gathering paces this year. In fact, as of Nov. 30, bond ETFs are outpacing their equity-based rivals in terms of new assets added this year.

Aggregate bond ETFs, such as the iShares Core US Aggregate Bond ETF (NYSEArca: AGG), remain staples for many advisors and investors. AGG is a broad play on mostly domestic investment-grade debt and generally invests at least 90% of its net assets in component securities of its underlying index and in investments that have economic characteristics that are substantially identical to the economic characteristics of the component securities of its underlying index.

“The Aggregate Bond Index includes investment-grade U.S.-dollar-denominated bonds with at least one year until maturity,” said Morningstar in a recent note. “The index is weighted by market value, tilting the portfolio toward the largest, most liquid issues, which are easy to obtain and cheap to trade. This approach also harnesses the market’s collective wisdom about the relative value of each security. That said, bond issuing activity influences the composition of this portfolio.”

While bonds have been the default safe haven amid the recent volatility in the equities market, it can be daunting to look at all the options, such as government debt and corporate bonds. One way to go about building a proper bond portfolio is to consider the risks first and foremost.

Investors Not Letting Up Soon

Investor appetite for bonds doesn’t seem to be letting up anytime soon and as the “recession” word keeps popping up in the financial markets, it will continue this way for quite some time.

AGG “is a conservative portfolio with minimal credit risk, which can make it a low hurdle for active managers,” according to Morningstar. “That does not make this an unattractive proposition, as risk and return are highly correlated in the fixed-income market. More than 70% of the assets in this portfolio carry a AAA rating, making it one of the more conservative options in the category. After controlling for risk, this portfolio is tougher to beat.  Like most investment-grated portfolios, interest-rate risk is the biggest driver of returns here. Its average effective duration is about 5.5 years, as of this writing, while the category average is about 4.75 years.”

The $67.23 billion AGG holds more than 7,700 bonds and has an effective duration of just over five years. AGG’s 30-day SEC yield is 2.23%.

Morningstar has a Silver rating on the fund.

For more on bond strategies, visit our Fixed Income Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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