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Learn To Love Indexing In Today's Bond Market

Sep. 15, 2016 1:29 AM ET
Louis Kokernak, CFA profile picture
Louis Kokernak, CFA


  • The Aggregate Bond Index is the most popular benchmark for fixed income investors.
  • Only 40% of intermediate bond funds outperformed index funds over the past 10 years.
  • Open market operations of the world's central banks have changed the way bond indices are constructed.

Many Americans are familiar with popular stock market benchmarks like the Dow Jones Industrial Average or the S&P 500. The fixed income area is a less visible to the public. This article will discuss the characteristics of the Bloomberg Barclays Aggregate Bond Index and how indexed bond investing fits into an investment portfolio.

Why Indexed Bond Investing?

Passive investment is a viable option in the fixed income markets just as it is in equity markets, though its numerical superiority isn't quite as dominant. Morningstar issues an Active/passive Barometer twice a year to compare the performance of active managers against passive managers. The ten year results ended December 31st, 2015 reveal that only 39.7% active bond managers outperformed their indexed counterpart funds.

There is bad news even for those managers that do beat their benchmark. Vanguard's latest Persistence Scorecard reveals that top quartile bond managers are no more likely to remain in that position than random chance would allow.

Over the five-year measurement horizon, the results show a lack of persistence among nearly all the top-quartile fixed income categories.

I wouldn't argue that these two reports alone advocate for the exclusive use of indexed bond funds. However, the data does drive home two consistent themes: Most active managers lag not just their benchmarks but actual funds managed to a benchmark; Even those that outperform for extended periods do NOT continue to outperform. At minimum, history argues for a considerable allocation to passive bond investments.

History and Composition

The US Aggregate Bond Index was developed at the boutique investment bank of Kuhn, Loeb in the 1970s. The index gained broad acceptance in 1986 after Wall Street powerhouse Lehman Brothers acquired of the smaller firm. Barclays inherited the index business through its 2008 acquisition of Lehman during the subprime crisis.

It is generally

This article was written by

Louis Kokernak, CFA profile picture
I have been a fee only financial advisor since 2002 and am a Chartered Financial Analyst and Certified Financial Planner. The cornerstone of the life savings strategy at Haven Financial Advisors is the investment in multiple asset classes with low cost and low turnover.The investment process is transparent.There are no "black box" funds or sudden swings in risk taking.

Analyst’s Disclosure: I am/we are long VBTLX, AGG, SCHZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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