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Understanding bond index funds

Immerse yourself in the Monevator archives (hey, it’s what Saturday nights were made for), and you’ll notice we talk a lot about investing in shares. Much less so about bonds.

Bonds – aka fixed income – are the unglamorous siblings to equities1. Yet whilst shares hog the limelight like a first child, you’ll be hard-pressed to find anyone – outside of the gold, guns and baked beans brigade – who say bonds have no part to play in a diversified investment portfolio.

Clearly bonds deserve more love – or at least another lengthy and excessively detailed Monevator article!

In this post we’ll dive into the nuances of the different bond funds out there, to help you find the right one for you.

Characteristics of bonds

Just like their equity equivalents, bond funds have their own special characteristics. As ever with investing, understanding these differences means more jargon to get to grips with.

Types

We can boil down bond funds into four types:

Conventionals and Linkers hold government issued bonds. Corporate bond funds contain bonds issued by companies.

Aggregate bond funds contain a mix of both government and corporate bonds. (Inflation-linked bonds are usually excluded from aggregate bond funds, and from all but dedicated inflation-linked bond funds).

Duration

Duration is the measure of sensitivity of the price of a bond to a change in interest rates.

Longer-term bonds have greater interest rate risk. That is, if interest rates go up their price falls, and vice versa.

Bonds are typically separated into Ultra-Short (no, not a bond superhero, but bonds with maturities less than a year), Short (a few years), Intermediates (around two to ten years) and Long (10 to 15 years or more).

Lars Kroijer has already covered the importance of duration and short vs long-term bonds in a previous Monevator piece. Check it out to get the low-down.

Credit Risk

Another key characteristic of bond funds is credit risk: How likely is the issuer to not pay you?

We can use credit ratings from the credit rating agencies as a proxy for credit risk.

Bond funds mostly invest in bonds divvied up into four main tranches of credit risk:

  • AAA-only – These are the safest fixed income investments.2
  • Investment grade – BBB or better, investment grade bonds are considered unlikely to default and so are held in large amounts by institutional investors and pension funds.
  • Sub-investment grade – Bonds issued by countries or companies that are looking a little ropey and could go pop. Excuse the technical jargon.
  • Mixed – An assortment of investment and sub-investment grade bonds.

Geography

Bond funds can also be split by geography. These range from Country-specific funds (such as UK or US) through regions (Europe, Asia) to Global funds.

Yield

Some bond funds specifically target high-yielding securities. Such bonds will typically be a mixture of high credit risk and/or long duration issues.

Goin’ shopping

Enough of the preamble. Let’s look at how we can passively invest in bonds.

To do so, we need to know what indices contain which types of bonds. As we go through some of the common indices, we will point out some examples of bond index funds that track them.

Aggregate indices

Let’s start off with Aggregate indices. The big cheese of the Aggregates is the Bloomberg Barclays Aggregate Bond Index (or affectionately known as the ‘Agg’).3

The Agg is a conventional government and corporate bond index. It does not include inflation-linked bonds. The underlying bonds must also be investment grade, which rules out low credit quality bonds.

There are different Aggs at the Global, Regional, and Country level.

At the Global level is the Bloomberg Barclays Global Aggregate Bond Index. This index has over 20,000 bonds. To put this into perspective, the equity-equivalent FTSE All-World index has merely 8,000 or so stocks. An example of a fund that tracks the Global Agg is the Vanguard Global Bond Index Fund.4

The Global index has a number of sub-indices, which track different maturities, credit ratings or particular characteristics (such as ESG-weighted).

As mentioned above, there are also Aggregate indices for specific regions and countries. The most prominent example is the US Aggregate Index. An example of a fund that tracks this index is the iShares US Aggregate Bond ETF (Ticker: IUAA).

As far as I’m aware there aren’t any index trackers that follow the UK Aggregate Index.5

Government bond indices

Next up are the government bond indices. Again at the Global level we have offerings from Bloomberg Barclays. We also have a few other indices that track different geographies.

For example, Citibank produce indices that track Developed and G7 markets6. The latter index is tracked by iShares Global Government Bond ETF (Ticker: SGLO).

We also have indices for the gilts market. For example, there is the Bloomberg Barclays Gilt Index – tracked by the Vanguard UK Government Bond ETF (Ticker: VGOV) – and the FTSE Actuaries UK Conventional All stocks. An example fund tracking this index is the iShares Core UK Gilts ETF (Ticker: IGLT).

As with the Aggregate indices, there are also sub-indices that focus on different levels of maturities and credit risks.

Corporate bond indices

Similar to their sovereign counterparts, there are the full range of Bloomberg Barclays Corporate bond indices. These range from Global through to Country-specific level.

Two example trackers are Vanguard’s Global Corporate Bond Index Fund, which tracks Global corporate bonds, and the Vanguard UK Investment Grade Bond Index Fund, which tracks UK investment grade corporate bonds.

There are a few other corporate bond index providers out there. Chief among them is iBoxx, which a number of iShares ETFs and the L&G Sterling Corporate Bond Index Fund track.7

Inflation-linked indices

At the global level there is – surprise surprise – a Bloomberg Barclays Inflation-linked index. This is tracked by Xtrackers’ Global Inflation-linked Bond ETF (Ticker: XGIG).

At the UK level there is the Bloomberg Barclays UK Inflation-linked Gilt index. This is followed by a Vanguard fund of the same name.8

As with conventional gilts, there’s also a FTSE Actuaries Inflation-linked Index. This is tracked by the Lyxor FTSE Actuaries UK Gilts Inflation-linked ETF (Ticker: GILI).

Emerging market indices

Interested in the emerging markets? You’ll find a number of different bond indices, from Bloomberg Barclays, FTSE, Bank of America, Merrill Lynch, and JP Morgan.

As with emerging markets equity funds, it’s particularly important to look under the tin of emerging market bond funds to see what they hold. That’s because the definition of what is an ‘emerging market’ differs significantly from provider to provider.

Fund managers offering emerging market bond trackers include the usual suspects: Vanguard, iShares, State Street (SPDR), Legal & General, and Xtrackers.

High Yield indices

Finally, there are a range of High Yield indices that specifically cover high yielding bonds. Such bonds tend to have lower credit ratings (usually sub-investment grade) and potentially offer the opportunity of higher returns, at the cost of higher risk and volatility.

Get ’em cheap

Very handily, Monevator scribe The Accumulator maintains a list of low-cost index trackers, including bond trackers. Have a peruse at your leisure. If you know of any good ones he’s not covered, please tell us about them in the comments.

Other factors to consider when choosing a bond fund

Before we jump the gun and start throwing our money into the market there are a few other factors to consider when choosing the right bond fund.

Currency hedging

When buying foreign denominated bonds without hedging you are taking on additional currency risk. Currency volatility can swamp the returns and volatility of bonds.

We can see this in the following two charts from Vanguard:

Source: Vanguard

Source: Vanguard

As we can see in the charts above, currency hedging reduces the volatility of bond returns. In addition, it has the effect of leveling the returns of bonds from different countries.

It is important to consider what risks we want take on when investing in bonds. If our aim is to get specific exposure to the potential risks and rewards of bonds – typically to diversify our portfolios, and to dampen volatility – then it is wise to strip out the extra risk from movements in currencies.

If you want to invest in international bonds, it is therefore worth thinking about whether you want to hedge your portfolio against swings in the global currency markets.

Market exposures

Each index and associated tracker exposes you to different markets, in different ways. It’s not going to be easy as an amateur investor to have a very informed view on such exposures, which is one reason why it’s usually best to stick to broad bond markets (and arguably just to government and perhaps investment grade bonds from the UK if you live in Britain). Remember bonds are mostly there in your portfolio for security, not return.

By way of example, let’s think about the Global Aggregate index and compare it to a similar index of shares.

  • When you invest in a fund that tracks a global market-weighted equity index, you are buying exposure to shares of the world’s most valuable companies (such as Amazon, Google and Apple).
  • In contrast, with market-weighted bond funds, you buy the most bonds from the most indebted countries (or, if you prefer the sound of it, the biggest issuers). This means loading up on bonds from countries like Japan, Italy, and Spain. It also means you get more corporate bonds from more indebted companies.

You can avoid being overweight a particular country or issuer by plumping for a ‘capped’ index. This is where the weight of any one issuer (or issue) is capped at a set amount.

Credit and duration risk

A third factor to bear in mind is the substantial differences in credit and duration risk between the different sub-classes of bond indices.

For example, UK gilts tend to have very long duration compared to government bonds of other countries. This means that they come with higher interest rate risk.

Similarly, many indices are investment grade only. They exclude bonds from high credit risk issuers, which should reduce volatility but could also exclude you from earning higher returns.

Float-adjusted indices

You might need to consider whether you should plump for a float-adjusted index. These indices account for the fact that central banks are often the largest buyer of government bonds.

For instance, a float-adjusted US Aggregate index excludes bonds held in the vaults of the Federal Reserve.9

Given the impact of Quantitative Easing over the past few years – which has seen central banks invest enormous sums in government bonds – the difference can be quite substantial.

Taking Vanguard as an example, most of its index funds and ETFs track float-adjusted indices. This has the effect of increasing the proportion of corporate bonds relative to government bonds in the Vanguard funds.

Heresy! Consider an active fund

I’ll whisper this bit in case The Accumulator hears me. With bond investing it can sometimes pay to go active.10

Sometimes the bond fund that seems right for you might have a specific profile that’s not achievable through an index fund. You might want to avoid certain countries or duration, or you may be looking to target high yield bonds. A combination of these requirements might make an actively-managed fund more suitable.

It’s worth keeping in mind that most of the returns on bond portfolios are explained by duration and credit risk.

Where there is more leeway (in the broader global indices) managers can tailor their exposure to these risks. For example a manager might underweight Japanese Government bonds or overweight short duration bonds.

As with investing in other assets, it’s important to work out what you need from your bond allocation first and then find the product that best fits.

Don’t neglect to consider costs! In today’s lower return world, the fees of an active bond manager could well gobble up a large percentage of your bond fund’s expected return.

Rounding up

Bonds are an important asset class. We tend not to talk or think about them enough.

Bonds can act as a diversifier and a de-risker to an investment portfolio, so it’s worth considering whether an allocation to bonds can help you meet your investment goals.

Hopefully this article has set out some of the factors to think about when investing in bond index funds and pointed you towards the options available.

If you have any tips of your own when it comes to passive bond investing, please do share them in the comments below!

Read all The Detail Man’s posts on Monevator, and check out his own blog at Young FI Guy where he talks about life as a financially free twenty-something.

  1. ‘Equities’ is just a fancier word for shares. []
  2. Unless they are sub-prime mortgage backed securities in 2007! []
  3. The Aggs date back many decades and were originally run by Lehman Brothers. In 2008 something bad happened to Lehman and Barclays took over. In 2016 Bloomberg started looking after the indices. []
  4. To be precise it tracks the float-adjusted index variant. More on that further on in this article. []
  5. If any of our savvy readers can correct me, please do! []
  6. Canada, France, Germany, Italy, Japan, United Kingdom, and United States. []
  7. These track the iBoxx Sterling Non-Gilts ex-BBB Index. []
  8. Specifically, it tracks the float-adjusted index variant. []
  9. I know they’re not actually held in vaults, but it’s boring to say ‘held in their electronic accounts’ []
  10. Actually The Accumulator has also considered active funds before in the bond space. []

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{ 27 comments… add one }
  • 1 Hemanth May 2, 2019, 5:23 pm

    I had this question since TA updated the Slow & Steady passive portfolio with the Royal London Short Duration Global Index-Linked Fund. Can anyone explain how a Global linker will protect against a UK hyper-inflation? UK might be in the grip of hyper-inflation but the rest of the world is unlikely to be in one at the same time. In that case Global linkers wouldn’t pay up to cover the UK inflation. Does the potential devaluation of GBP help?

  • 2 Onedrew May 2, 2019, 6:49 pm

    A few months ago I switched from VGOV to two Barclays Global Aggregate Bond Indexers that are hedged to GBP, namely iShares AGBP etf and Vanguard’s VRXXA (the etf with iWeb, the fund with Charles Stanley) mainly because the durations were shorter and risk rating fell from 4 to 3. As a Lars Kroijer believer I felt I was breaking the rules a bit but that the reduced volatility and hedging gave some additional comfort and I liked the etf TER reduction for .15% to .10%.
    So far I have been happy with the move, but it’s early days and I have not got near needing to rebalnce.
    AGBP is quite new, but I would be interested in Lars’ or anyone else’s take on this.

  • 3 Steve the Lurker May 2, 2019, 7:19 pm

    Is the size of a bond fund relevant when there are 2 similar funds to choose from? For example, IGLT is £1.6bn whereas VGOV is only £128m. Is a larger fund safer?

  • 4 ZXSpectrum48k May 2, 2019, 8:05 pm

    “Duration is the measure of sensitivity of the price of a bond to a change in interest rates.” To be precise the (modified) duration is the sensitivity of the price of a (par) bond to a change in that bond’s yield. For a portfolio, the duration is the price sensitivity to a parallel shift of yield curve (moving the yield of all the bonds up/down by the same amount). The issue with saying it’s the sensitivity to a change in interest rates is that this can be misinterpreted to imply that duration measures the sensitivity to changes in central bank policy rates, which would be wrong.

    Duration can lead you astray when thinking about the total return properties of bond portfolios. On a day to day basis, long duration bonds will typically move in price by more than short duration bonds (i.e. the daily price volatility is higher). This masks the fact that over time, yields on long-duration bonds tend to be more stable and mean-reverting. This effect has been nicely demonstrated by the Fed’s 200bp tightening cycle, from 0.25% to 2.25%, between Dec-16 and Dec-18. Naively, you might have thought that short-duration bonds would be the safest. In fact, the only part of the yield curve to actually underperform cash, by 2%, was the short duration 1-3 year sector. The best performing part of the yield curve was the 10 year+ sector of the curve, the part with the highest duration. It outperformed the shortest, 1-3 year sector, by 5.4%. This is because the short-end has a much higher correlation to policy rates than the long end, resulting in yield curve flattening.

  • 5 Mathmo May 2, 2019, 11:01 pm

    Interesting overview — I seem to have owned most of those at various time in my aim to make every investing mistake possible, lurching from the yield-chasing of corporates to the interest-rate shelter of ultrashorts.

    I have ended up (or is it just the latest mistake?) in AGBP – hedged global aggregate. Global because I get to mitigate whoever is tinkering most with QE this month and yes I know the hedge is expensive but I get something that I think preserves sterling value when global equities take fright possibly with sharp currency movements to boot. And that’s after all what I want my bond portfolio to be: a store of value while I wait for equities to get cheap, rather than a source of yield per se.

  • 6 xxd09 May 2, 2019, 11:19 pm

    Retired 16 years
    Bond section of Portfolio is Vanguard Global Bond Index Fund (Hedged to the pound)
    Returned just over 5%pa over the last 10 years
    Does what a Bond should for an a Investment Portfolio -“a good anchor to windward “ in the words of John Bogle
    Tried and tested
    Equities then free do the heavy lifting
    xxd09

  • 7 Greg May 3, 2019, 9:23 am

    Cap-weighting has always seemed strange to me for bonds when investing and while AGBP seems a good one-stop shop if one thinks it won’t matter that much, I’ve tried to become aware of other indexes.

    I remain unconvinced of the value of hedging even in bonds. Remember, volatility can be to the upside! My feeling is that if the UK ends up in a bad state and my job becomes under pressure, just as prices rise etc, the pound would fall. This would be when I want my bond holdings to increase in (GBP) value! If the UK does well and my financial life outside investments is easier, then I won’t mind a bad bond return caused by GPB strengthening.

    To me, it feels like the hedging process for high quality government bonds simply converts them into the equivalent of your own government bonds. I think UK Gilts are systemically bad because the pension funds are forced to buy them, meaning that they are artificially low. Whereas in the US, the pension funds’ targets are so high, they are forced to hold more risky holdings meaning US yields are systemically too high.

    Therefore, I would go with an unhedged global fund.

    How about these ETFs?
    L&G LOIM Global Government Bond Fundamental UCITS ETF – USD Unhedged (GBP) | CORG (0.27%)
    http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P00015T1S

    L&G LOIM Global Corporate Bond Fundamental UCITS ETF – USD Unhedged (GBP) | CREG (0.35%)
    http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P00015T1Q

    L&G LOIM Emerging Market Local Government Bond Fundamental UCITS ETF – USD Unhedged (GBP) | LOCG (0.56%)
    http://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P00016MHY

    I’ve included an EM bond ETF above as I like the sound of EM bonds – the countries themselves are more diverse and their debt load is less, but they pay a lot more. The ETFs themselves just seem a little expensive. Short-term EM bonds might also be a way of squeezing out a little extra return for those who are more cautious:
    UBS ETF – J.P. Morgan USD EM Diversified Bond 1-5 UCITS ETF
    SEMC: Unhedged (0.42%), UBXX: Hedged (0.47%)

    Having said all this, I don’t hold any bond funds at all. The closest I have are a small holding in SQN Asset Finance Income (SQN / SQNX) and a smaller one in the rather esoteric VPC Speciality lending (VSL). These don’t fulfil the same purpose at all!

    Perhaps there is space in my portfolio for a small holding; my gut says go with CORG.

    Any thoughts?

  • 8 Guido Maluccio May 3, 2019, 11:25 am

    @Onedrew – I’ve also considered AGBP but not yet available from my broker. I’m still holding separate global government (IGOV) and corporate bond funds and find it difficult to know how to allocate between them.

  • 9 Naeclue May 3, 2019, 11:29 am

    If you cannot find a bond tracker fund with the duration you want, a simple and IMHO better solution than going for an actively managed fund is to buy 2 funds straddling the duration you are looking for. The net duration will be the weighted average duration of the 2 bond funds. Alternatively, hold a long duration bond fund and cash deposits (cash deposits have zero duration).

    If you just want a gilts fund, it is relatively straightforward and cheap to run your own. Choose the duration you want then buy gilts straddling that duration. For example, if you want a 10 year duration, start by buying equal amounts of gilts of approximate duration 7, 8, 9, 10, 11, 12, 13 years. After 1 year sell the short dated gilt and buy a longer dated one. To keep the portfolio and duration in balance, sometimes you might end up buying more than one gilt, especially if you are rebalancing in/out of your gilts fund at the time. Even so, for reasonable sized portfolios, the turnover costs are low as most gilts have very narrow spreads and there are no additional costs, such as stamp duty, other than the dealer fee.

    Gilts can be bought in very small denominations, unlike corporate bonds where you might have to buy in lots of £5000 nominal or more, so you can be precise about holdings and not end up left with hundreds to thousands in uninvested cash. When I buy I specify the cash amount I went to invest, including accrued interest, and the deal normally comes within a few pounds of the amount I specify.

    One other suggestion I would make with gilts, gilt funds and possibly other bonds funds as well, is as far as possible to buy inside a tax shelter. The reason for that is that many gilts are trading way over par, so your gilts fund might have a running yield of 3-4% and you will be taxed on that income, even though the gross redemption yield is much lower.

  • 10 Guido Maluccio May 3, 2019, 11:29 am

    Regarding active bond funds, this recent Rekenthaler article is very relevant.
    “For most intermediate-term bond funds, they have [beaten the aggregate bond benchmark], once the additional advantages of being light in Treasuries and owning non-agency mortgage bonds are considered. Even after paying their costs, 75% of intermediate-term bond funds have outgained the Aggregate Index over the past decade. Remove the tailwind of sector exposure, and the after-cost victory disappears.” [However, you can’t buy an index that replicates this sector exposure.]
    https://www.morningstar.com/articles/924591/bondfund-managers-enjoy-a-happier-hunting-ground.html

  • 11 MJCROSS May 3, 2019, 12:51 pm

    Thanks for the excellent article, which would have been even MORE useful had it been around a month ago when I was setting up my SIPP portfolio (70% bonds, all ETF).
    Honestly in truth it would probably have just made me even more nervous, and in the end I followed ‘Smarter Investing’ (Tim Hale) and plumped for 50/50 linkers vs. non-linkers across 75% govt vs. 25% corporates, globally diversified. The hardest part was finding ETFs with a short enough duration (<5yrs); and my biggest allocations are to TI5G, UBXX and FLOS.

  • 12 Hari May 3, 2019, 3:24 pm

    With the hedged Bond ETFs I know the hedge has a cost related to the difference in interest rates between the underlying currencies, I wonder how much this costs in practice on something with a fairly low yield say AGBP and a higher yield hedged junk bond ETF for example.

  • 13 Adrian May 3, 2019, 3:36 pm

    For me it comes down to whether you want an asset negatively correlated to global equities or one which lacks as much volatility as possible.

    If you want the former then I’d go unhedged with iShares Global Aggregate Bond UCITS ETF USD [AGGG]. Or maybe Vanguard Long Duration Gilt Index fund or iShares Overseas Government Bond Index. Or a Gilt index tracker.

    If you want the latter then iShares Core Global Aggregate Bond UCITS ETF [AGBP]. Or Vanguard Global Bond Index fund

  • 14 Mousecatcher007 May 3, 2019, 4:09 pm

    @ Hemanth

    A global IL bond fund won’t 100% protect you against rampant UK inflation. The thinking however is that inflation in the developed world ex-UK has a high degree of correlation with UK inflation, and that therefore a global fund gives you *reasonable* protection with the added benefits of diversification and, currently, lower duration risk. The likes of Tim Hale very much urge the hedging of all your global bonds to GBP specifically to remove/limit currency volatility from what should be the steady-eddy part of your portfolio. Do have a read of his:

    https://monevator.com/why-uk-inflation-linked-funds-may-not-protect-you-against-inflation/uk-rpi-vs-us-cpi_schroders_p-6/

  • 15 The Details Man May 3, 2019, 4:58 pm

    Thank you as ever for all the thoughtful and helpful Monevator comments!

    @Steve – A large fund is not necessarily safer. I guess the risks you are implying relate to manager risk (the fund manager going bust) and liquidity risk. I’d guess that Vanguard is no more or less likely to go bust than Blackrock. Likewise, VGOV has been around for a while now – so it’s quite established unlike say a new fund that might be struggling to raise AUM. With liquidity, the jury is out on whether bond ETFs are vulnerable to liquidity shocks. I’d say given the market (gilts) and VGOV being traded on the LSE, the likelihood of an ETF’s pricing becoming detached from the underlying gilt price is low.

    @ZX – thanks as ever with chipping in with the detail. You are of course right. I think Cullen Roche (at Prag Cap) did a few explainers on this a while back. So for those looking to delve deeper, it’s worth checking his blog out.

    @Guido Maluccio – Thanks for that link. A good read. It refers to an excllent bit of research by Michael Mauboussin that featured in the Weekend Links a few weeks ago after I passed it on to TI ;). Well worth a read!

  • 16 Ben May 3, 2019, 8:16 pm

    Ok ill be that guy (again).

    I’m young (ish (very ish)). I don’t own any bonds.

    First off, long term, shares do better than bonds, so I’m giving up growth.

    2nd, I can squirrel enough away in higher paying accounts, that beat bond rates, and mean I wont need to touch my S&Ss in the short term.

    Yes the stars could align, share prices could crash, my public sector employed partner could lose her job, whilst the car gets destroyed in an uninsurable way, whilst the same happens to the house. I judge that unlikely though.

  • 17 ZXSpectrum48k May 3, 2019, 9:18 pm

    @Naeclue. Absolutely right. Want a duration of 6 but only have a funds with duration of 4 and 12. Easy put 50% in cash (duration 0) and 50% in the fund with duration 12. Or put 75% in the fund with duration 4 and 25% in the fund with duration 12. Result: weighted portfolio duration of 6. It’s known as a cash and duration neutral barbell. For this reason, I really don’t understand why retail investors seem to fear long duration bond funds and instead desire short duration funds. It misses the point.

  • 18 Martin T May 4, 2019, 5:07 pm

    Very useful post. Mrs T and I currently work part time, with a view to drawing our pensions in the next 10 years. I recently sold off part of our equities with a view to investing in bonds as a safeguard against a disastrous fall just as we crystallised, but haven’t quite managed to make the move yet. Buying bonds seems like joining the gym or cutting down on alcohol consumption – I know it’s a good idea, but somehow never get round to it…!

  • 19 Foxy May 5, 2019, 8:59 am

    Nice article, YFG. I think it’s also worth mentioning that investors should not fear interest-rate risk if their goal is to hold the bond fund for its average maturity.

    If interest rates rise, the fund price may fall but bonds being bought right now by the fund will compensate us at a higher yield. So a bond fund should behave like owning individual bonds while taking out the single entity risk.

    Having said that, you may want to hold bonds as “cash on steroids waiting to be deployed into equities”, in which case present price does matter and you better stick to high-quality short-term bond products. Although short-term ones won’t *always* protect you from interest-rate increases, due to yield curve flattening as ZX has rightly pointed out. However, that should not be the norm.

    So to sum up, if your time horizon roughly matches the average maturity, there should be no principal loss due to interest-rate increases.

  • 20 MrOptimistic May 5, 2019, 7:51 pm

    In terms of bond duration, if in drawdown where bonds are what you will sell if equities down, I assume shorter duration is preferred?

  • 21 Dan Bond June 19, 2019, 3:58 pm

    Im keen to invest in the iShares Global Aggregate Bond UCITS ETF USD [AGGG]. As a UK investor, however, I see that it has not got “reporting status”. How should this impact my decision? Are there any $ based global bonds ETFs with reporting status? Thanks.

  • 22 Andrew Seib June 19, 2019, 5:56 pm

    Hi Dan
    Just checking I have this right: you are a UK investor but you want to buy the index in USD rather than Sterling? Re reporting status, I assume you mean UK reporting status. You can track this index with AGBP, which has UK reporting status, but is hedged to the pound. Apologies if I am missing the point.

  • 23 Dan Bond June 19, 2019, 8:23 pm

    Thanks Andrew. You’re spot on. I’m a UK investor wanting to buy the index in USD (AGGG). However the USD version of the index is still “seeking” UK reporting status. I don’t want the hedged version as don’t want the hedging cost neutralising the role of the US Treasuries. Thanks for any insight you can provide in thinking this one through further.

  • 24 Dan Bond June 19, 2019, 9:19 pm

    Andrew, Ive just looked online and it now shows that AGGG does have UK reporting status. Unless Ive gone mad, this has potentially changed very recently (perhaps after I dropped them an email asking when it will switch from “seeking” to “yes”). Or perhaps Ive been staring at my screen too long! Sorry for any confusion.

  • 25 The Investor June 20, 2019, 9:32 am

    Chaps — I’ve no knowledge of this specific fund, but reporting statuses can change pretty quick, particularly if a fund was fairly recently launched.

  • 26 Dan Bond June 21, 2019, 2:16 pm

    Thanks folks. I spoke with iShares who say their list of what has UK Reporting Status or not was not up to date / contains mistakes and they are currently working thru the site rectifying it. So worth double checking if any one else is ever in my shoes.

  • 27 Onedrew June 24, 2019, 3:29 am

    I see Vanguard have just launch an ETF version of their gbp-hedged global bond index tracker, VAGP. Like iShares AGBP, it has an OCF of .10%. Both are distributing, Vanguard’s monthly, ishares twice a year. Nice to have this additional choice.

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