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What you need to know about bond indexing


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
TickeriShares ETFUS Morningstar Category1 Year5 Year10 Year
AGG iShares Core U.S. Aggregate Bond ETF Intermediate-Term Bond 32% 36% 80%
LQD iShares iBoxx $ Investment Grade Corporate Bond ETF Corporate Bond 82% 48% 64%
MUB iShares National Muni Bond ETF Muni National Intermediate 52% 26% 40%
TIP iShares TIPS Bond ETF Inflation Protected 50% 27% 28%
EMB iShares J.P. Morgan USD Emerging Markets Bond ETF Emerging Market Bond 59% 23% 72%
HYG iShares iBoxx $ High Yield Corporate Bond ETF High Yield Bond 32% 58% 73%

Source: Morningstar, as of 12/31/18. Based on pre-tax returns.Based on pre-tax returns. The following number of funds were used for the 1, 5 and 10 year period percentile rankings. Intermediate Term Bond: 1019, 767, and 560 funds. Corporate Bond: 250, 150, 84 funds. Muni National Intermediate: 297, 228, 151 funds. Inflation Protected Bond: 228, 167, 106 funds. Emerging Market Bond: 295, 174, 49 funds. High Yield Bond: 695, 507, 329 funds. Past performance does not guarantee future results.

Most active managers in the Morningstar Intermediate Term Bond Category 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 tend to 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.

Bond strategy correlations with S&P 500

Active managers have had higher correlation to equities versus broad bond indexes

Bond strategy correlations with S&P 500

Source: Morningstar as of 12/31/18. Time period measured from 1/1/00 – 12/31/18. Correlation measures how two securities move in relation to each other. Correlation ranges between +1 and -1. A correlation of +1 indicates returns moved in tandem, -1 indicates returns moved in opposite directions, and 0 indicates no correlation. Past correlations not indicative of future correlations.

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.