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A Broader Bond Market for a Good Price

Phillip Yoo, CAIA

Phillip Yoo: IShares Core Total USD Bond Market provides market-cap-weighted exposure to the broad U.S. dollar-denominated bond market, spanning the entire credit spectrum. The fund efficiently tracks the Bloomberg Barclays U.S. Universal Index, and it is currently the only fund replicating the index. Also, its fee is one of the lowest in the intermediate-term bond Morningstar Category.

It uses a sampling strategy to track its index, which measures the total U.S. dollar-denominated, fixed-rate, taxable-bond market. It weights these securities by market capitalization, tilting the portfolio toward investment-grade bonds. The investment-grade portion takes up more than 90% of the fund, in-line with its category peers. Also, low-yielding, yet secure U.S. Treasuries and government-sponsored enterprise mortgage-backed-securities make up roughly half of the portfolio. The category average is approximately 40%. As a result, this fund delivers a relatively lower yield despite its higher yielding holdings rated below investment grade.

The index this fund tracks is also the parent index for the widely followed Bloomberg Barclays U.S. Aggregate Bond Index. As such, constituents in the Bloomberg Barclays U.S. Aggregate Bond Index made up more than 80% of the index. And the remaining balance was comprised of high-yield corporate bonds, emerging-markets debt, and asset-backed-securities, such as commercial mortgage-backed-securities and residential mortgage-backed-securities.

Its bias toward highly rated securities could help mitigate the credit risks associated with high-yield holdings and preserve its value during market downturns. During the financial crisis, the fund's underlying index gained 3.9% while the category declined by 0.4% on average.

Overall, this ETF is a good, low cost vehicle for comprehensive exposure to the U.S. dollar bond market, and the fund receives a Morningstar Analyst Rating of Silver thanks to its low fee, good index-tracking record, and strong portfolio management team.