Aggregate index

What Is an Aggregate Index?

An aggregate index is a broad-based financial benchmark designed to measure the performance of a significant segment of the bond market. It typically comprises a diverse collection of fixed-income securities, encompassing government debt, corporate bonds, and securitized products. The most prominent example, the Bloomberg US Aggregate Bond Index (often simply called "the Agg"), represents the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market within the realm of fixed income investing, a core component of investment management. This type of index provides investors with a comprehensive view of how a broad universe of debt instruments is performing, serving as a vital tool for assessing market trends and evaluating portfolio performance.

History and Origin

The concept of an aggregate index for bonds evolved to provide a standardized measure of the broader bond market, akin to how stock indexes track equity markets. The precursor to what is now known as the Bloomberg US Aggregate Bond Index was initially developed in 1973 by Art Lipson and John Roundtree at Kuhn, Loeb & Co. They created two total-return indexes for U.S. government and investment-grade corporate bonds. These separate indexes were later combined in 1979 to form the Government/Credit Index. In 1986, mortgage-backed securities (MBS) were incorporated, leading to its renaming as the US Aggregate Index, with historical data backfilled to 1976.¹⁸

Over the years, the index underwent further changes in ownership and branding. It was maintained by Lehman Brothers as the Lehman Aggregate Bond Index until November 2008, when Barclays Capital acquired Lehman Brothers' index business, renaming it the Barclays Capital Aggregate Bond Index. In August 2016, Bloomberg L.P. acquired Barclays' index and risk analytics business, leading to the index being co-branded as the Bloomberg Barclays US Aggregate Bond Index. Finally, in August 2021, it was rebranded to its current name, the Bloomberg US Aggregate Bond Index. The index has become a cornerstone benchmark for the U.S. bond market, with its methodology publicly detailed by Bloomberg.¹⁷

Key Takeaways

• An aggregate index provides a broad measure of the overall bond market's performance.
• The Bloomberg US Aggregate Bond Index is the most widely recognized aggregate index in the U.S.
• It typically includes investment-grade U.S. government, corporate, and securitized debt.
• Investors often use aggregate indexes to benchmark the performance of their bond portfolios and evaluate market trends.
• These indexes are widely tracked by index funds and exchange-traded funds (ETFs).

Interpreting the Aggregate Index

Interpreting an aggregate index involves understanding its composition and how changes in its value reflect the broader bond market. The Bloomberg US Aggregate Bond Index, for example, is a market-capitalization-weighted index, meaning bonds with a larger outstanding par value have a greater influence on the index's performance.¹⁶

When the value of an aggregate index rises, it generally indicates that bond prices in the underlying market have increased, often correlating with falling interest rate risk or improving economic sentiment regarding issuer credit risk. Conversely, a decline in the aggregate index suggests that bond prices have fallen, which typically occurs when interest rates rise.¹⁵ The yield of the index components can also provide insights into the general interest rate environment and the income potential of a broad bond portfolio. As of late 2023, yields on the Bloomberg U.S. Aggregate Bond Index were around 4.5%, levels not seen since the Great Financial Crisis.¹⁴

Hypothetical Example

Consider an investor who holds a diversified bond portfolio. To gauge the performance of their holdings against the broader market, they might compare their portfolio's returns to the Bloomberg US Aggregate Bond Index.

Suppose the aggregate index returned +1.5% over a quarter. If the investor's portfolio, comprising various government and corporate bonds, returned +1.8% over the same period, it suggests their portfolio slightly outperformed the general bond market as represented by the aggregate index. Conversely, if their portfolio returned +1.0%, it underperformed the aggregate index. This comparison helps the investor understand whether their investment decisions added or detracted value relative to a passive market exposure. Such an aggregate index serves as a standard for evaluating the efficacy of portfolio diversification strategies within the fixed-income space.

Practical Applications

Aggregate indexes are indispensable tools in the financial world, particularly within fixed income investing.

• Benchmarking: Portfolio managers and individual investors use an aggregate index as a primary benchmark to assess the performance of their bond portfolios or bond funds. For instance, the iShares Core US Aggregate Bond ETF (AGG) tracks this index, providing a low-cost way for investors to gain broad exposure to the U.S. bond market.¹², ¹³
• Asset Allocation: Financial advisors and institutional investors consider the aggregate index's historical performance and current yield to make strategic asset allocation decisions, balancing fixed income with other financial assets like equities. The Federal Reserve Bank of St. Louis, for example, provides extensive data on bond yields and other relevant economic indicators that influence such decisions.¹¹ Market outlooks, like those from LPL Financial, often refer to the aggregate index when discussing the role of fixed income in diversified portfolio strategies.¹⁰
• Market Analysis: Economists and analysts use the aggregate index to understand overall trends in interest rates, credit risk, and investor sentiment within the bond market. Changes in the index's composition over time, such as the increasing proportion of government bonds like Treasuries, offer insights into the evolving landscape of debt markets.⁹
• Product Development: Fund providers create index funds and exchange-traded funds (ETFs) that aim to replicate the performance of the aggregate index, offering investors simple, low-cost access to a broad bond market exposure.

Limitations and Criticisms

Despite its widespread use, the aggregate index, specifically the Bloomberg US Aggregate Bond Index, faces several limitations and criticisms:

• Limited Scope: The index is restricted to investment-grade, U.S. dollar-denominated, taxable bonds with at least one year to maturity.⁷, ⁸ This means it excludes significant segments of the bond market, such as high-yield (junk) bonds, municipal bonds, foreign-denominated bonds, and certain mortgage-backed securities (MBS) and asset-backed securities (ABS). Consequently, it does not fully represent the entire universe of investable fixed-income securities.
• Sensitivity to Interest Rates: A substantial portion of the aggregate index, approximately one-third, is composed of U.S. Treasuries, making it highly sensitive to U.S. monetary policy and changes in interest rates. This exposes the index to considerable interest rate risk. When rates rise, the index's value typically falls, as demonstrated by periods of negative returns.⁶ The conservative nature of its underlying bonds and its relatively long duration can lead to notable declines in value during unexpected rises in long-term yields.⁵
• Market-Cap Weighting Bias: Being market-capitalization-weighted, the aggregate index assigns greater weight to the largest issuers of debt. This often means a heavier allocation to entities with more debt, such as the U.S. government. Critics argue this might not always align with optimal portfolio construction, as it inherently allocates more to borrowers with higher levels of indebtedness.
• Historical Context: Some critics point out that the index's history, effectively starting in the mid-1970s and backfilled to 1976, largely spans a period of declining interest rates from historical highs. This historical context means the index has experienced relatively few years of negative returns, potentially creating an impression of lower volatility than might be the case in a sustained rising rate environment.⁴

Aggregate Index vs. Equity Index

An Aggregate Index, such as the Bloomberg US Aggregate Bond Index, and an Equity Index are both types of financial benchmarks, but they track fundamentally different asset classes and serve distinct purposes for investors.

The main point of confusion often arises when investors consider how both indexes perform relative to each other. While an aggregate index generally exhibits lower volatility and more consistent, albeit smaller, returns than an equity index, there are periods when bonds can outperform stocks, especially during economic downturns when investors seek the relative safety of fixed income.³ Conversely, in strong economic expansions, equities typically generate significantly higher capital appreciation.

FAQs

What types of securities are included in the Bloomberg US Aggregate Bond Index?

The Bloomberg US Aggregate Bond Index generally includes U.S. Treasury securities, government-related bonds, corporate bonds, mortgage-backed securities (MBS), and asset-backed securities (ABS). All included securities must be U.S. dollar-denominated, fixed-rate, taxable, and rated investment-grade or higher. They must also have at least one year remaining until maturity.¹, ²

Why is the Aggregate Index important for investors?

The aggregate index is crucial because it serves as the most widely accepted benchmark for the U.S. bond market. Investors and fund managers use it to evaluate how their bond investments are performing against a broad market standard. It also allows investors to gain diversified exposure to the bond market through index funds and exchange-traded funds (ETFs) that track the index.

Does the Aggregate Index include high-yield bonds or municipal bonds?

No, the most commonly referenced aggregate index, the Bloomberg US Aggregate Bond Index, specifically excludes high-yield (junk) bonds and municipal bonds. It only includes investment-grade taxable debt. This means it doesn't represent the entire universe of debt, but rather a specific, higher-quality segment of the fixed income market.

How does interest rate changes affect an Aggregate Index?

Changes in interest rates have an inverse relationship with bond prices. When interest rates rise, the value of existing bonds, and consequently the aggregate index, generally falls, because newly issued bonds offer higher yields, making older bonds less attractive. Conversely, when interest rates fall, bond values typically increase. The longer the duration of the bonds in the index, the more sensitive the index is to interest rate fluctuations.