Using ETFs To Build A Complete Bond Portfolio

ETF Database

In recent years, ETFs have become increasing popular tools for accessing the fixed income corner of the market. The space initially grew much more slowly than equity ETFs, but investors have gradually become more comfortable with the combination of fixed income exposure and the exchange-traded structure. Innovation in the bond ETF space has been impressive in recent years; a number of first-to-market products have popped up that allow for precise access to various corners of the global bond universe.

Among the most popular bond ETFs are two products in the Total Bond Market ETFdb Category: AGG and BND. These ETFs have aggregate assets of more than $20 billion and individually trade close to one million shares daily. Both AGG and BND are linked to the Barclays Capital U.S. Aggregate Bond Index, a broad-based benchmark that covers the investment grade U.S. bond market. For many investors, an allocation to one of these products–or to one of a number of similar offerings–accounts for the vast majority of the fixed income portfolio.

There’s certainly a lot to like about these products; they offer cheap exposure to asset classes that should be a core component of most long-term portfolios. But any strategy that involves using these ETFs as one stop shops for bond access is limiting in nature–and potentially costly in terms of risk/return optimization. While funds such as AGG and BND may cover a significant portion of the U.S. bond market, they only scratch the surface of the various types of fixed income securities available to U.S. investors.

Many ETFs that offer exposure to the investment grade U.S. debt market are dominated by Treasuries, a bias that results from the sheer size of the U.S. government’s debt obligations. The result is a meaningful concentration within a single issuer (or network of related issuers) that may be less than optimal for those seeking to construct a balanced long-term portfolio... read more.