With uncertainty and volatility now here to stay, fixed income investors are starting to reevaluate their portfolios. Central bank easing and persistent inflation create considerable policy ambiguity. That’s a huge issue for many portfolios. It’s tough to deal with when you’re using indexing for your bonds.
Investment bank Goldman Sachs may have the answer.
The secret, according to Goldman, may lie in active ETFs. Thanks to the fact that the overall composition of many key bond benchmarks has changed over the past decade, the current environment doesn’t suit indexing. The case for active ETFs in the fixed income space is as strong as ever.
A Big Shift
When it comes to bonds, the Bloomberg U.S. Aggregate Bond Index (Agg) is the benchmark du jour. Created back in the 1970s by investment bank Kuhn, Loeb & Co., the Agg has quickly grown into the de facto benchmark when looking at investment-grade bonds in the U.S., and it’s easy to see why.
The Agg tracks the performance of the entire U.S. investment-grade fixed-income securities market- over 10,000 different bonds. This includes U.S. Treasury bonds, corporate bonds, mortgage-backed securities (MBS), and asset-backed securities (ABS). Moreover, the securities in the index range in maturity from one year to over 20 years. As such, the average bond in the Agg has a maturity of around 8.6 years — putting it right in the middle of bond maturities and durations.
With that, many institutions, retail investors, and financial advisors look towards the Agg as their go-to for bond allocations. Funds reflect this. For example, the iShares Core US Aggregate Bond ETF holds more than $131 billion in assets, making it one of the biggest ETFs on the planet.
However, Goldman Sachs has a big issue with the Agg. That issue comes down to its shifting nature.
Looking at the composition of the Agg, we can see that it has shifted over the last decade. According to Goldman, the weight of Treasuries in the index has increased considerably over this time as the U.S. has increased its debt load. Since 2015, the weight of treasury bonds in the Agg has increased by 9% and now sits at more than 45% of the entire index. 1
To make way for that increase in Treasury debt, other investment-grade sectors have shrunk. For example, MBS have seen their allocation in the benchmark slip by 4% over the past 10 years. Other government-related securities have slipped by 3.9% and emerging-market debt by 1.1%. Yes, the Agg does contain investment-grade debt issued by emerging market nations.
This chart from Goldman sums up the ever-shifting nature of the Agg.
Source: Goldman
A Looming Issue
For Goldman and investors looking at the Agg for their fixed income allocations, a big issue is looming. With more than half of the index now skewed towards treasury debt, portfolios are now more closely tied to U.S. fiscal and monetary policy than ever before. That’s not necessarily such a great thing given all the uncertainty and potential hiccups facing the U.S. Already, this fiscal uncertainty has started to drive bond prices lower as new risks demand higher yields. Goldman notes that Agg now yields 4.7%, slightly higher than the historical average, due to the rise in treasury yields resulting from lower prices.
While a higher yield is excellent for investors seeking compensation, Goldman shows that investors could achieve higher yields without the associated treasury woes. Many of the credit-intensive sectors of the Agg- which are underrepresented in the index- can offer additional yield and spread pick-up. This thereby increases returns for the same credit quality.
Goldman’s last problem with the Agg is that the shift in allocation has also altered the benchmark’s duration. Duration is essentially a measurement of a bond’s interest rate risk that also considers factors like a bond’s maturity, yield, coupon, and call features. The measurement can be used to figure out how much a bond will fall when rates rise, and vice versa. For example, if the Fed raises rates by 1%, a bond with a 5-year average duration would see its price drop by 5%. Goldman notes that the effective duration of the Agg now stands at six years. That’s well above its long-term average of just under five years. This helps explain why the Agg has been so volatile during the last period of interest rate increases.
With these reasons in tow, Goldman Sachs suggests that the Bloomberg Agg not be used by investors in a modern context, at least not for their entire bond allocation.
Active ETFs For The Win
The answer to Goldman is to go active via ETFs.
That’s because active management doesn’t have to look like the Agg. Active managers have some flexibility and leeway when selecting securities, even those who focus on intermediate investment-grade, such as what the Agg tracks. They are allowed to play with the index construction to build a portfolio outside of the Agg. So, if a manager feels corporate bonds offer a better deal than Treasuries, they can buy them. If they are worried about duration, they can go down the ladder as the Agg includes bonds with at least one year left until they mature.
For Goldman, this fact enables active managers to participate in some of the previously overlooked and more lucrative sectors of the investment-grade universe, such as asset-backed securities (ABS), commercial mortgage-backed bonds (CMBS), and collateralized loan obligations (CLOs). All of which are not included at all or in very small weightings in the Agg.
Active ETFs add additional wins that other fund structures can provide- this includes eliminating cash drag as well as using the creation-redemption method to reduce taxes. Adding in ETFs’ low costs and intra-day tradability, and you have a recipe for success.
Luckily, Wall Street has become hip to this fact. Today, there have been numerous active ETFs covering the core, core-plus, and total return bond sectors. This allows investors to use these ETFs as a replacement or in concert with exposure to the Agg.
Core-Plus & Dynamic Income ETFs
These ETFs were selected based on their low-cost exposure to active bond management within the unconstrained, dynamic, and core-plus sectors. They are sorted by their YTD total return, which ranges from -1.2% to 2.8%. They have expenses ranging from 0.10% to 0.71% and assets ranging from $63M to $18B. They currently yield between 4.2% and 5.5%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| JCPB | JPMorgan Core Plus Bond ETF | $5.78B | 2.8% | 5.3% | 0.40% | ETF | Yes |
| BOND | PIMCO Active Bond ETF | $5.5B | 2.5% | 5.3% | 0.71% | ETF | Yes |
| VPLS | Vanguard Core Plus Bond ETF | $138M | 2.5% | 4.8% | 0.2% | ETF | Yes |
| TOTL | SPDR DoubleLine Total Return Tactical ETF | $3.5B | 2.3% | 5.1% | 0.55% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $18.1B | 2.2% | 5% | 0.36% | ETF | Yes |
| AVIG | Avantis Core Fixed Income ETF | $1B | 2.2% | 5% | 0.15% | ETF | Yes |
| BINC | BlackRock Flexible Income ETF | $8.14B | 2.1% | 5.5% | 0.52% | ETF | Yes |
| FIXD | First Trust TCW Opportunistic Fixed Income ETF | $4.32B | 2.1% | 4.3% | 0.65% | ETF | Yes |
| DBND | DoubleLine Opportunistic Bond ETF | $413M | 2% | 4.8% | 0.45% | ETF | Yes |
| DFCF | Dimensional Core Fixed Income ETF | $243M | 2% | 4.6% | 0.19% | ETF | Yes |
| CGCP | Capital Group Core Plus Income ETF | $4.5B | 1.8% | 4.8% | 0.34% | ETF | Yes |
| VCRB | Vanguard Core Bond ETF | $63M | -1.2% | 4.2% | 0.10% | ETF | Yes |
All in all, the Bloomberg Agg index continues to shift and change its make-up. According to Goldman, that puts investors at risk for reduced returns and increased volatility. Treasury debt isn’t what it used to be. To win, the choice is clear. Go active and look outside the Agg for additional yield and returns.
Bottom Line
The Bloomberg Bond Aggregate is the king of bond indices. But it should not be. According to Goldman Sachs, new risks are emerging. The answer is to go active for your bond holdings.
1 Goldman Sachs (July 2025). Beyond the Index: Active Fixed Income Investing in Turbulent Times
