Investment grade bonds

August 24, 2020

Few question whether investment grade bonds provide substantial portfolio benefits. High quality bonds have historically been used as “anchors to windward” in diversified portfolios. However, some investors debate how best to structure an investment grade bond portfolio.

In this paper, we briefly discuss the diversification benefits of investment grade bonds. We then discuss the effectiveness of using a popular broad bond index—the Bloomberg Barclays Aggregate—and its composition methodology as the basis for the fund’s approach. Specifically, the paper describes the history of the index, its composition, and some of the changes it has undergone over time. Furthermore, it outlines the index’s strengths and weaknesses, and proposes possible alternatives.

Despite several known drawbacks related to the index’s composition, we recommend the use of the Bloomberg Barclays Aggregate over several common alternatives for most investors except those pursuing an asset-liability matching approach to portfolio management.