Investment Fundamentals: Understanding Bond Mutual Fund Benchmarks

By Mitchell J. Smilowitz, CPA

The Joint Retirement Board offers five actively managed bond mutual funds, one passively managed bond index fund and a balanced, or hybrid, fund that includes both stocks and bonds. To assess the performance of these funds, the JRB uses a variety of benchmarks. This article reviews the indices used to benchmark these mutual funds.

ICE Bank of America U.S. Treasury 1-3 Year Bond Index

Intended to assess the short-term U.S. Treasury bond market, the ICE Bank of America U.S. Treasury 1-3 Year Bond Index measures the performance of U.S. debt publicly issued by the U.S. government. Bonds in the index mature in a minimum of 1 year but less than 3 years.  The average duration of bonds in the index is 1.87 years.

The Metropolitan West Low Duration Bond Fund is benchmarked to this index.

Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index

The Bloomberg Barclays U.S. Treasury Inflation-Linked Bond Index measures the performance of the U.S. Treasury Inflation Protected Securities (TIPS) market. The index mirrors the full range of U.S. TIPS with maturities of more than one year.  The average duration of bonds in the index is 7.28 years.

The Vanguard Inflation-Protected Securities Fund is benchmarked to this index.

Bloomberg Barclays U.S. Securitized Index

The Bloomberg Barclays U.S. Securitized Index reflects the performance of fixed-income investments whose payments are backed by assets that are independent of the credit of the issuer. The index is comprised predominately of residential mortgages, but also includes asset-backed securities, commercial mortgages and covered bonds. Historically, over 99% of the securities included in the index are AAA. The average duration of the bonds in the index is 4.5 years.

The Goldman Sachs U.S. Mortgages Investor Fund is benchmarked to the Bloomberg Barclays U. S. Securitized Index.

Bloomberg Barclays U.S. Aggregate Bond Index

The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate, intermediate term taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities. The average duration of bonds in the index is 5.85 years.

The Western Asset Core Bond Fund is benchmarked to the Bloomberg Barclays U.S. Aggregate Bond Index.

Bloomberg Barclays U.S. Aggregate Float Adjusted Index

The Bloomberg Barclays U.S. Aggregate Float Adjusted Index measures the investment return of investment-grade, taxable, fixed-income securities in the United States — including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities — all with maturities longer than 1 year. The average duration of bonds in the index is approximately 6 years.

The Vanguard Total Bond Market Index is benchmarked to the Bloomberg Barclays U.S. Aggregate Float Adjusted Index.

Other Benchmarks

Sometimes no single index adequately reflects the contents of a mutual fund. This is the case with the Fidelity Strategic Income Fund offered by the JRB. This multi-sector bond fund includes U.S. Treasury bonds, foreign government bonds and investment grade and high yield corporate bonds. The benchmark used to evaluate the performance of this fund combines the data from four bond indices:

  • The Bank of America Merrill Lynch U.S. High Yield Index (40% of the value of the benchmark) measures the performance of short-term U.S. dollar-denominated below investment grade corporate debt publicly issued in the U.S. domestic market.
  • Bloomberg Barclays U.S. Aggregate Bond Index (30% of the value of the benchmark) is described above.
  • JPMorgan Emerging Market Bond Index (15% of the value of the benchmark) tracks total returns for emerging market debt in dollars and euros. To be included in the index, a bond offering must have a minimum value of $500 million.
  • Citigroup World Government Bond Index (15% of the value of the benchmark) includes government bonds from developed and emerging markets. To be included in the index, a government’s long-term domestic credit rating must be upper-medium grade and subject to low credit risk, must exceed $50 billion and there must be no barriers to entry.

The Fidelity Puritan Fund, a balanced, or hybrid, investment option offered by the JRB, holds both stocks and bonds. The stock portion of the fund, which accounts for about 60% of its assets, is benchmarked to the S&P 500. The 40% bond component of the fund is benchmarked to the Bloomberg Barclays U.S. Aggregate Bond Index (see above).

Understanding bond market benchmarks is central to evaluating the performance of your portfolio allocated to bonds. If you have questions about the role bonds play in your investment portfolio or the allocation among different types of bonds in your portfolio, please contact us via email or call 888-JRB-FREE (572-3733).