Many investors and financial advisors are familiar with the Bloomberg US Aggregate Bond Index—commonly known to as the “Agg.” This widely followed capitalization-weighted bond market index is often used as the benchmark for the intermediate-term fixed income universe, and both institutions and individual investors often gravitate toward mutual funds and ETFs that track the Agg as an inexpensive way to build a core bond portfolio.

In theory, this sounds perfectly reasonable. After all, investors have fully embraced such an approach for large-cap domestic stocks, and many feel that this is appropriate for fixed income as well. However, we (Victory Income Investors) think there are limitations and hidden risks lurking in a philosophy that simply allocates to a fund indexed to the Agg. Are you aware of these potential passive fixed income pitfalls? 

Issues with Issuance

The fixed income universe is an enormous and complex market. It is much more diverse than the Agg represents, and it is arguably quite challenging to track the overall bond market efficiently (certainly by comparison to large-cap equities).

One often-overlooked factor is the way the Agg is constructed. We like to point out that it is an issuance-driven index, so its constitution is ever-shifting as it aims to incorporate (a representation of) all the new debt coming to market. As a result, the composition of the Agg becomes naturally tilted toward the largest debtors. This seems sub-optimal. As an investor, do you really want your core fixed income portfolio heavily tilted to those simply with the ability to issue massive amounts of debt?

This concern is especially relevant today. For example, banks issue a lot of debt, so they have typically represented the largest corporate credit exposures in the index. Yet investors may not always want such exposure to the banking sector, depending on pending regulatory issues, yield curve trends, or other factors. And let’s not forget the massive amount of capital now flowing toward artificial intelligence. We estimate by the end of 2026, the largest five tech companies will issue more than 5% of all corporate debt in the U.S. Again, investors may not want an overweight allocation to the largest AI borrowers at a time when there’s debate about an AI bubble. Rather, we think there’s far greater value in employing deep fundamental research and being highly selective in security selection.

It's also important to remember that a passive approach to fixed income does not necessarily mean less risk. In fact, the make-up of the Agg has materially changed over time, and that may leave investors exposed to more risks (and the wrong type of risks) than they understand. Consider two examples of changing exposures that negatively impacted investors in passive products that tracked the Agg:

1. In the lead-up to the Global Financial Crisis of 2008/09, which was fueled by very low interest rates and runaway optimism in the housing market, the issuance of mortgage-backed securities (MBS) peaked. In fact, in November 2008, MBS represented almost 45% of the Agg at the very time that the mortgage market was beginning to melt down. Loading up on MBS at the height of their popularity was exactly what was happening with the Agg at that time.
2. The duration profile of the Agg also tends to change over time. Duration is a measure of a bond’s interest rate sensitivity, with a lower number meaning less risk to changes in interest rates. The long-term average duration of the Agg over the past three decades has been approximately 5.2. But in the lead-up to the Federal Reserve’s battle against inflation, the duration of the Agg had risen to approximately 6.8 (at year-end December 2021). So at the very time that the Federal Reserve was beginning its most aggressive rate-hike cycle ever, investors using passive ETFs that tracked the Agg were taking on an increasing amount of interest rate risk. That turned out to be the wrong move at the exact wrong time, so it should come as no surprise that the Agg clocked in with its worst ever annual total return in the following year.*

Fast forward to today and we’re seeing the composition of the Agg shift again due to its issuance-based nature. With the soaring U.S. deficit, Treasury issuance has spiked. As of the end of February 2026, Treasuries accounted for an estimated 46% of the Agg’s constitution. Add in another large dollop of securities tied to AI infrastructure-related debt, and it would be right for investors to question whether this was adequate diversification and appropriate for a core fixed income allocation.

Actively Managing Risk

There are other potential limitations of a passive approach as well. Remember, the Agg only includes securities representative of roughly half the U.S. bond market, thus leaving an opportunity for an active manager to allocate to potentially higher-yielding sectors that may be excluded. For example, the Agg does not hold certain structured products or municipal bonds, which might present attractive risk-reward opportunities. Moreover, during the past several years we have seen periods of elevated volatility, a dynamic that may endure. But whenever near-term prices dislocate from fundamentals, it also creates the potential for active managers to allocate to various sectors and sub-asset classes opportunistically.

We believe that an actively managed fixed income approach can strategically allocate across asset classes to better manage risk and improve potential income opportunities in various market environments. It might also avoid the unintended consequences of passive allocations that change over time based on the types of bonds being issued. So while the large passive fixed income funds that track the Agg may be cheap and easy to buy, we think there’s a far better way to build a core fixed income allocation.

*The total return of the Bloomberg US Aggregate Bond Index was approximately negative 13% in 2022, the worst year for the index since inception in 1976.