Bond indexing is a way of investing in bonds by tracking or mirroring a specific bond index. Instead of handpicking individual bonds, investors can buy a bond index fund or an exchange-traded fund (ETF) that holds a diversified portfolio of bonds. This strategy allows investors to easily gain exposure to a broad range of bonds and potentially achieve similar returns as the bond index they are tracking.
Full definition
I'd much rather be swinging it around with FX and derivatives than trying to beat the medium - term
corporate bond index by a couple of basis points.
Low - fee stock index and short - term government
bond index funds may form the core of a portfolio.
I interviewed two financial advisors who are strengthening their core by using
municipal bond indices and the ETFs that track them.
I've used currency and stock and
bond index ETFs, but not commodities so far.
Other index funds follow the
treasury bond index, commodities index, futures index, as well as many foreign indices.
More than 70 % of the bonds in developed - market
government bond indexes today have yields of 1 % or lower, as the chart below shows.
In other words, global
sovereign bond index funds are few and far between, and I have never seen anyone recommend them as a core holding.
If you want to include lower cost global and
international bond index funds in your portfolio, you could consider bond ETFs.
In 2008, when the global stock market shed about a third of its value, broad -
market bond index funds delivered over 6 %.
I'm a fan
of bond index funds for the fixed - income portion of a portfolio.
As you might guess, stock indexes track the stock market, and
bond indexes track the bond market.
Note that this ETF aims to track the performance of an inflation -
linked bond index.
The goal is «positive absolute returns» in excess of an appropriate
broad bond index.
Bond ETFs track diversified
bond indexes for corporate, government and municipal bonds.
By comparison, traditional broad -
based bond index funds include hundreds of holdings, but remember, there just aren't that many discount bonds available in the marketplace.
The two
bond indices also had varying performance profiles in increasing and declining interest rate environments.
ETFs are now typically a more efficient substitute for major global equity indices and for
bond indices like credit derivatives.
Also,
most bond indexes don't include smaller bond issues to minimize the problems associated with a lack of liquidity.
Even when
using bond index total returns, the current starting bond yield has been highly accurate in predicting returns over the life of the bonds.
The weighting of each security in a market -
cap bond index depends on both the issuance amount and the price of the security.
The combination of the stock and
bond indices makes possible consistent analyses of the two most important asset classes for investors.
Not just because interest rates are low but
because bond indexes have greater interest - rate risk, coupled with a tiny buffer to help offset losses.
For example, an all -
bond index portfolio has provided a small but consistent return, while an all - equity index portfolio has provided a larger but more erratic return.
More often the large borrowers get in over their heads because they can, partly aided by the ratings, and partly due to
bond indexes giving them large weights because they are large.
This year, I predict that we'll hear a lot more about smart beta in fixed income as an attractive alternative to traditional
passive bond indexes.
The 10 country -
level bond indices calculated in local currencies all ended the year with positive total returns.
Today, a traditional
bond index exchange - traded fund (ETF) with an average term of about 10 years has a yield to maturity of about 1.7 %.
When my book was written, the earliest
bond index data I could find was from 1973.
The ETF pays no distributions at all: the swap is designed to deliver the total return of a
diversified bond index, and all of the growth is reflected in price changes.
Bond indexes combine these elements in a variety of ways, allowing investors to access both broad and narrow segments of the bond market through the ETFs that track them.
We use a five - year bond as representative of the approximate duration risk an investor faces in a broad emerging markets local
currency bond index.
Stock investors therefore sometimes
study bond indexes to try to discern trends in the price and yield movement of bonds.
It is actually much more difficult to track a corporate
bond index than many investors realize.
A look at the four newcomers to the exchange - traded fund universe —
what bond indexes they track and how they work.