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What you need to know about bond indexing

Performance

Various bond index strategies, like iShares bond ETFs, have strong performance within their Morningstar category across a broad range of sectors.

Similar to equity ETFs, many bond ETFs have delivered competitive returns across a variety of sectors, ranking above median in many categories over the long-term.

In general, we would expect an index exposure to deliver the “market return.” However, many iShares Bond ETFs have competitive performance relative to other ETFs and mutual funds.

While performance rankings change over time, certain iShares bond ETFs have tended to be above median of performance in their respective Morningstar categories.

Morningstar Category percentile rankings based on total return

Like equities, an index strategy does not necessarily mean average returns.

% Rank in Category
(based on total return)
Number of Funds Rated in Category
TickeriShares Bond ETFMorningstar Fund Category1 Year5 Year10 Year1 Year5 Year10 Year
AGG iShares Core U.S. Aggregate Bond ETF Intermediate Core Bond 27% 25% 52% 403 312 238
LQD iShares iBoxx $ Investment Grade Corporate Bond ETF Corporate Bond 2% 15% 39% 218 132 83
MUB iShares National Muni Bond ETF Muni National Intermediate 21% 32% 37% 281 217 149
TIP iShares TIPS Bond ETF Inflation Protected Bond 27% 25% 25% 225 165 108
EMB iShares J.P. Morgan USD Emerging Markets Bond ETF Emerging Market Bond 11% 16% 30% 296 194 49
HYG iShares iBoxx $ High Yield Corporate Bond ETF High Yield Bond 28% 40% 61% 711 632 344

Source: Morningstar, as of 9/30/19. Comparison universe is ETFs and mutual funds in the Morningstar category and uses total return. Total return represents changes to the NAV and accounts for distributions from the funds (excluding any applicable sales charges). Percentile ranking in category represents outperformance of the fund’s total return relative to all funds that have the same Morningstar Category. Past performance does not guarantee future results.

Most active managers benchmark against the Bloomberg Barclays U.S. Aggregate Bond Index, which is mainly comprised of very high quality securities such as U.S. Treasuries and Agency MBS. However, these managers may hold out-of-benchmark tilts to sectors such as high yield, emerging markets or lower quality securitized or structured investments. As yield is an important component in total return, these higher yielding tilts provide a means to outperform a high quality, low yielding benchmark such as the Aggregate, but they can also increase the correlation with equity investments.

A closer fit benchmark is the Bloomberg Barclays U.S. Universal Bond Index, investable via the iShares Core Total USD Bond Market ETF (IUSB), which also has a tilt towards high yield, and as a result, the potential for higher returns than the Aggregate.