However, the Agg isn’t perfect. Thanks to its static nature and how it’s constructed, there are some issues with the index. We saw those issues come to fruition last year as the Fed raised rates.
To that, a core-plus fund could be an interesting option for fixed income investors. By allowing managers to slightly tweak the Agg, better returns and higher yields can be found. It’s here that fixed income seekers can win.
The Issues With the Agg
But the Agg does have some limitations.
For starters, the index is market-cap weighted. For equities, market-cap may be a problem. But for fixed income it can be. The reason is that market-cap-based bond indexes are overweight based on the amount of debt outstanding. The firms with the most debt get a higher place in the index, which is counter-intuitive as you’re now holding the biggest debtors’ bonds. In the case of the Agg, that’s the U.S. government.
Then there is duration risk and yield to consider. We saw duration come into play as the Fed raised rates and the Agg sank by over 13% in 2022. Meanwhile, the focus on government bonds keeps the benchmark’s overall average yield low.
Ultimately, these issues can hurt portfolios.
Moving Beyond the Agg Index
By doing this, investors can have better returns, limit losses, and potentially have higher yields from their fixed income portfolio.
The proof can be in the pudding. The category is relatively new, with Morningstar only tracking it since 2019. Last year, core-plus bonds held their own versus the index and so far, this year, they’ve managed to produce additional returns over the index. The debt ceiling debacle has created additional appeal for corporate debt, which the category can be overweight. The same can be said for mortgage bonds, which are now producing very high yields as the housing mess has continued.
Looking ahead, recessionary forces and the Fed’s potential to pause and even cut rates could help on returns over the Agg.
Don’t forget to check all bond funds here
Making a Core-Plus Play
So, what funds to buy? Fixed income-focused shop Lord Abbett has top rated core-plus funds in the Lord Abbett Core Plus Bond (LAPLX), while the American Century Core Plus (ACCNX) is a prime top-rated example of a core-plus fund that allows managers to own some non-investment-grade debt. PIMCO’s world famous Total Return (PTTAX) is also considered a core-plus fund, but the focus also includes capital appreciation within the Agg’s universe.
The active ETF boom is another way core-plus is winning. The JPMorgan Core Plus Bond (ONIAX) is already a top-performer in the space. However, the JPMorgan Core Plus Bond ETF (JCPB), which is run the same way, has started to outperform its mutual fund sister. The key? Low expenses are helping it win. As more managers launch active ETFs, the core-plus bond space could get very competitive on fees, boosting investors’ returns. Other prominent players in the active space include State Street and Baird.
Some Top Performing Core-plus Bond Funds
|Name||Ticker||Type||Active?||AUM||YTD Ret (%)||Expense|
|JPMorgan Core Plus Bond ETF||JCPB||ETF||Yes||$330 million||3.1%||0.4%|
|BlackRock Total Return Inv A||MDHQX||Mutual Fund||Yes||$18.6 billion||1%||0.74%|
|JPMorgan Core Plus Bond||ONIAX||Mutual Fund||Yes||$16.9 billion||1%||0.75%.|
|Calvert Green Bond A||CGAFX||Mutual Fund||Yes||$852 million||1%||0.73%|
|Baird Core Plus Bond Inst||BCOIX||Mutual Fund||Yes||$24.3 billion||0.8%||0.3%|
|PIMCO Total Return A||PTTAX||Mutual Fund||Yes||$62 billion||0.5%||0.81%|
|State Street Income Fund||SSASX||Mutual Fund||Yes||$1.58 billion||0.2%||0.17%|
|American Century Core Plus||ACCNX||Mutual Fund||Yes||$490 million||0.1%||0.56%|
|Lord Abbett Core Plus Bond||LAPLX||Mutual Fund||Yes||$428 million||-0.2%||0.68%|