Qualifying bonds must have at least$ 300 million in outstanding face value. The index is market-value-weighted and rebalances each month. This results in a conservative portfolio that limits return and yield potential but also caps risk.
The portfolio's conservative complexion mimics that of the taxable, U.S. investment-grade bond market. U.S. Treasuries account for almost 43% of the portfolio, with agency mortgage-backed securities, and corporate bonds making up 26% and 24% of the portfolio, respectively. These figures differ from the category average, which places greater emphasis on corporates and other securitized fare, at the expense of Treasuries. The fund also excludes high-yield debt. Some peers allocate as much 5% of their portfolios to sub-investment-grade bonds, further accentuating the fund's conservative bend relative to category peers.
Average effective duration has fluctuated in recent years. As an index fund, the fund is beholden to the issuing activity of bond types prevalent in the portfolio. This means the issuing activity of U.S. Treasuries and agency MBS’ largely determine the makeup of the portfolio. As the Federal Reserve cut rates to zero following the initial coronavirus-driven shock in early 2020, issuance of low-coupon, longer maturity debt surged, and this portfolio collected the bulk of those bonds. This led to higher duration and lower coupons compared with active peers.
With less credit risk comes less reward, and the fund leaves yield on the table by focusing on U.S. Treasuries and other AAA rated debt. Its average coupon and 12-month yield consistently trail the category average, with average coupon and 12-month yield falling 33 and 20 basis points short of the category norm, respectively, as of February 2023.
Note: The Process Pillar rating and analysis are indirectly assigned by an analyst. When an analyst covers a passively managed vehicle that tracks a particular index, Morningstar associates the Process Pillar rating assigned to that vehicle with the index concerned. Morningstar then maps the Process Pillar associated with a given index to any other uncovered passive strategies that track the same index. This ensures that the analyst’s view is leveraged whenever available and promotes consistency when analyzing passive vehicles associated with a given index.