Advisor Insights

To Index Bonds or Not?

John Rekenthaler

Miriam Sjoblom, director of fixed-income ratings for Morningstar Global Manager Research, recently caught my attention. For the first time in since forever, she surmised, the 10-year average return for intermediate-term bond funds was above that of  Vanguard Total Bond Market Index (VBMFX). (This article uses that fund as its example, but it applies to all funds that index investment-grade U.S. bonds.)

Cleverly, I feigned skepticism, thereby spurring Miriam to run the numbers. She returned, vindicated. As shown in EXHIBIT 1, until this summer, Vanguard Total Bond Market Index had beaten its actively run competitors in every trailing 10-year period since December 1999. In June, though, its relative-strength line crossed into the red, and it has been headed down ever since. (The category average includes all funds that existed at the time, even if they have since expired, and it adjusts for the number of a fund’s share classes, so funds that possess many share classes are not overcounted.) The fund’s 10-year Morningstar Category ranking has plummeted, such that the fund ranked in the bottom quintile through October.

John Rekenthaler does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.