By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
The Barclays U.S. Aggregate Bond Index is the most-used benchmark to track the performance of U.S. bond market returns.
Over its 43-year history, this benchmark has changed remarkably. In 1973, it held just U.S. government bonds (49%) and corporate bonds (51%). Risks for investors were split nearly equally.
In 1983, a third type of bond, mortgage-backed, was added. These bonds were owned by government agencies like Ginnie Mae, Freddie Mac and Fannie Mae. By that time the allocation of this index was 59% government bonds, 24% corporate bonds and 17% mortgage-backed bonds. And, if you associate the mortgage-backed bonds with the U.S. government since they were offered by quasi-government agencies, the nearly even split from 1973 became 83% government bonds and 17% corporate bonds.
In 1993, asset-backed bonds were added and became 2% of the Barclays Aggregate Index. Asset-backed bonds are based on loans for credit card receivables, autos and home equity. These bonds have never made up more than 6.5% of the index.
These four bond categories have remained in place with some fluctuation through the years as new bonds are issued and others mature. Currently, the Barclays U.S. Aggregate Index’s allocation is 39.5% government bonds, 29.5% corporate bonds, 28.4% agency mortgage-backed bonds, .6% asset-backed bonds and 1.9% commercial mortgaged-backed securities.
The important understanding here is that evaluating returns and measures of risk against those of an index may not be as useful as hoped because the makeup of the index has changed.
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