Using ETFs to Create a Properly Diversified Bond Portfolio
Friday, July 23rd, 2010Morningstar submits:
By Timothy Strauts
We often encounter investors who own as many as eight different funds to cover their equity exposure but only one or two bond funds for their fixed-income exposure. Conventional asset allocation theory dictates that investors should have at least 30% of their portfolio in bonds. We find it perplexing that investors don’t show the same level of attention and differentiation to the fixed-income portion of their portfolio as they do their equity stakes. This disproportionate tilt toward completely passive investing in fixed income could be the result of less familiarity to the composition of the Barclays U.S. Aggregate Bond Index, which is the most widely followed U.S. bond index. The two largest ETFs that track this index are iShares Barclays Aggregate Bond (AGG) and Vanguard Total Bond Market (BND). Many investors buy these funds for their entire bond allocation because both offerings offer a simple way to get access to the U.S. bond market in a low-cost package.
