There are some things in life I just don’t get, such as the Twilight series, vanilla ice cream, and Justin Bieber. It’s not that I dislike these things; I’m just not a fan. (My colleague Joel Dickson doesn’t get why soccer players can’t use their hands, but that’s another story.) I also don’t get recent claims that the Barclays U.S. Aggregate Bond Index (the Agg) is now somehow greatly different than it has been.

Some have asserted that the Agg isn’t as good a bond index because it “overweights” U.S. Treasuries. Others have expanded the focus to say that it has too big of a weighting in U.S. government bonds.

The figure below shows the Agg’s historical sector weights. While the weighting of Treasuries has fluctuated a bit over time, its current proportion looks pretty much in line with the historical average. For those who prefer to use a broader definition of “government” bonds, I’ve stacked government-related (which includes U.S. agencies) and agency mortgage-backed securities (MBS) on top of Treasuries. If one considers all three (blue, green, and yellow together) to be a form of government bonds, it looks as if their combined weight has been consistent over time, especially considering that the ’70s and early ’80s were a time when agency MBS ramped up their presence in the marketplace.


The argument is that too much U.S. government bond exposure leads to lower yields, thus hurting investors.  The graph below debunks that argument. Regardless of how the sectors are officially classified, market participants determine the amount of compensation they demand for credit and prepayment risk in the form of “spread.” This graph quantifies the spread as the difference between the yield-to-worst of the Agg and the yield-to-worst of the Barclays U.S. Treasury Index.


Yes, the spread fluctuates, and, yes, there was a big spike at the time of the global financial crisis. However, the current amount of spread seems to be around the long-term trend, maybe, actually, a bit higher.

As Vanguard has noted before, investment-grade¹ bonds remain a good source of diversification. Low-cost index funds and ETFs that track the Agg are a great way to access that exposure. As for the notion that the Agg is vastly different today than it was in the past? I just don’t get it.

I would like to thank my colleague Joshua Hirt for his contributions to this blog.


1 A bond whose credit quality is considered to be among the highest by independent bond-rating agencies.


All investing is subject to risk, including possible loss of principal.

Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.

U.S. government backing of Treasury or agency securities applies only to the underlying securities and does not prevent share-price fluctuations. Unlike stocks and bonds, U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.

Diversification does not ensure a profit or protect against a loss.

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