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What's The Duration, Kenneth?

|Includes:iShares Core Total U.S. Bond Market ETF (AGG), CRED, GOVT, MBB

This morning, I received a communication from iShares that provides many details regarding their fixed income products.

Right off the bat, I noticed that the effective duration listed for the iShares Barclays Aggregate fund (NYSEARCA:AGG) was 4.40 years, much less than the five year number I had floating around in my head. So, I went to the Barclays indexes site and found that the duration for the Barclays Aggregate bond index was 5.06.

iShares takes the data from Barclays and then runs it through their own prepayment estimates for mortgage bonds. Reporting the duration on their own model isn't necessarily bad or good, but simply points out the fact that no one actually knows what the duration of the bond market is because one of the major sectors, mortgage bonds, are subject to continued optionality determined by the mortgage holders.

This is quite different from other markets, where the investments do not have this kind prepayment issue. For example, the different durations between the Barclays indexes and the iShares products for three major sectors of the comprise most of the Aggregate.

(click to enlarge)Click to enlarge

There are differences between the indexes and the ETF products for the Treasury (NYSEARCA:GOVT) and credit (CFT) sectors, but those are minimal compared to the mortgage sector (NYSEARCA:MBB) where the reported duration for the iShares product is half of what the index provider reports.

Again, this is not good or bad, but an illustration of how uncertainty creeps into data that most investors do not really question. So what is the duration of the Aggregate? Nobody knows for sure, but that five year number floating around in my head still seems useful enough.