Cheap Access to the Investment-Grade Bond Market
This fund's high-quality tilt can help diversify and protect an investor's portfolio.
Bond funds can help diversify a portfolio, generate stable cash flows, and provide downside protection. However, some bond funds may take on additional credit or interest-rate risk to provide better returns than more-protective peers. While taking on additional credit risk can help performance in the short term, it can make an investor's bond portfolio more correlated to equities and reduce its diversification and protection benefits during periods of market turmoil. Investors looking for a core bond portfolio with a high-quality tilt may consider iShares Core U.S. Aggregate Bond (AGG). The fund is one of the largest, cheapest, and most liquid ways to get exposure to the Barclays U.S. Aggregate Bond Index--the index that most intermediate-term bond investors try to best.
The fund targets fixed-rate, investment-grade government, corporate, and securitized bonds that are denominated in U.S. dollars and weights its holdings by float-adjusted market capitalization. As a result, the portfolio skews heavily toward government and securitized bonds, which account for about 70% of the portfolio, much greater than the intermediate-bond Morningstar Category average (20%) as of March 31, 2015. This gives the fund a high-quality portfolio. The average credit rating of its holdings is A, which is higher than its average intermediate-term bond peer's (BBB). While that may help the fund hold up better when equities or lower-quality bonds sell off, it can also result in lower expected returns amid credit rallies or risk-seeking environments. Further, the fund's duration of 5.3 years is longer than the category average of 4.9 years. That could hurt the fund's relative performance in a period of rising interest rates. However, the fund's diversification across the yield curve can reduce this risk.
Thomas Boccellari does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.