Interest in passive (index) investments has grown significantly in recent decades, with more investors turning to low-cost index options. Investors seeking a taxable core U.S. fixed income strategy may invest in index funds that seek to replicate the returns of the Bloomberg Barclays U.S. Aggregate Index (the “Agg”). Investors should be aware that index characteristics can change considerably over time, which can also expose the investor to unwanted, and avoidable, risks.
As interest rates have fallen in recent decades, the Agg’s yield has also declined. Increasingly, those low yields and growing treasury exposure in the index have lifted the index’s duration (or degree of interest rate sensitivity). When yields are falling, that longer duration can be beneficial; however, with interest rates now exceptionally low, a long-duration portfolio creates additional downside risk to investors should interest rates rise. At the same time, the incremental yield provided by long-term treasuries is limited, suggesting that investors aren’t being well compensated for taking that risk.
Active bond managers have an advantage in their ability to create a high-quality portfolio, while seeking opportunities to add value and manage around unwanted risks. There is a place for indexing in investment portfolios, but it isn’t without risk. As with any investment, understanding those risks is critical.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.