By
iShares ETFs
:
Fixed income might have the word "fixed" in its name, but there
is nothing truly "fixed" about it - it's actually a very dynamic
asset class that is constantly growing and evolving.
While it's one thing to say that, it's another to see it in
action, and you can do that by looking at the Barclays US Aggregate
index. The Aggregate is the most commonly used fixed income
benchmark by US investors, according to Morningstar and BlackRock
data as of July 31. It is also the stated benchmark for a range of
mutual funds and ETFs - both index and active. Think of it as the
bond market's equivalent of the S&P 500 index. The same way you
wouldn't expect the S&P 500 index to hold the same companies it
did when it was first published in 1957 (anyone remember Gimbel
Brothers or Montgomery Ward?), you wouldn't expect the Aggregate to
look the same today as it did when it was launched.
If you were tracking the Aggregate since its inception, what
would you have seen in the past 26 years? Let's take a look back in
time.
History of the Barclays US Aggregate Index
Bond market indices appeared on the scene in the 1970s. The
first indices were comprised of government and corporate bonds,
while sectors like mortgage and asset-backed securities were still
in their infancy. The Government Credit index was the first
flagship benchmark. It was designed for pension plans and other
taxable investors to be a benchmark for their bond portfolios. In
1986, mortgage-backed securities were added to the Government
Credit index to create a new benchmark and the Aggregate was born.
Over time, the index rules for the Aggregate have evolved to
reflect changes in market composition, bond issuance sizes and the
sectors deemed investible by investors.
Click to enlarge
(click to enlarge)
The Barclays US Aggregate Index is a market value weighted
index, so as more bonds are issued in a sector or industry, the
weight of that sector will increase in the index. In addition, as
the price of a particular bond or sector changes, so too does its
weight in the index. (Keep in mind that the Aggregate index only
includes the taxable US bond market, meaning muni bonds are
excluded.)
How do these rules play out in the real world? Well, let's look
at Treasuries. We are all very aware of the increase in government
debt that we have seen in the past few years. This issuance has
driven the Treasury component of the Aggregate up from 21% in 2002
to 36% today. But look at the chart below. Despite this recent
surge, this weighting is still far below what we saw in the 1980s
and 1990s, when Treasuries reached a peak of 56%. In the 1990s the
Treasury began buying back outstanding debt, while Corporate and
MBS issuers continued to bring new bonds to the market. As a
result, the weighting of Treasuries fell in the Aggregate, while we
saw the weightings of Corporates and MBS rise.
Click to enlarge
(click to enlarge)
The chart shows other ways in which the history of the financial
market in general and the bond market in particular are echoed in
the Aggregate. We can see that securitized assets such as
mortgage-backed securities ((MBS)) jumped in index weighting from
2006 until 2008, as more mortgage loans were originated to fuel the
housing boom. But once the housing bubble burst, fewer mortgages
were originated and the weight of MBS in the index dropped.
Let's look at US Agency securities. These securities were
originally included in the Government index until a stand-alone
agency index was created in 1994. From there, we saw their issuance
and index weight rise steadily in the Aggregate for the next
decade. But that trend ended in 2009, when the two largest issuers
in the index, Fannie Mae and Freddie Mac, entered government
conservatorship and began to reduce the size of their balance
sheets. With smaller balance sheets, their borrowing needs have
declined and so too has the weighting of government agencies in the
Aggregate index. Today, Agencies represent only 6.6% of the
Aggregate.
As you can see, since 1986 the Aggregate index has remained
anything but static. An investor holding an Aggregate-based fund
will see that fund morph over time to reflect the economic
realities of the day. Despite all of these changes, the Aggregate
index has maintained a
correlation
with the S&P 500 index of 0.002 in the past 10 years, according
to BlackRock and Bloomberg data as of July 31. That allows the
index to
provide diversification against riskier asset
classes
in a broad portfolio, and Aggregate-based funds can offer core bond
market exposure. But just as the Aggregate has evolved, so too have
bond funds. Investors looking for more customized exposure can
mix and match segments of the Aggregate
and combine them with other fixed income exposures to create a
portfolio tailored to their investment needs.
Original post
See also
Daily State Of The Markets: Waiting On The
Numbers
on seekingalpha.com