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In Nod to Index Funds, 'Agg' Bond Benchmark Changing Rules

Rule change will push $304 billion in bonds out of the Bloomberg Barclays U.S. Aggregate Bond Index.

By Trevor Hunnicutt | NEW YORK

One of the most widely tracked market indexes is raising its admission standards, potentially offering relief to index-fund managers and pressuring bonds that failed to make the cut.

Starting April 1, the Bloomberg Barclays U.S. Aggregate Bond Index will hold most kinds of debt only if at least $300 million of the bond remains on the market, up from $250 million.

The rule change pushes $304 billion in bonds out of the index, nearly 2 percent of its value, while allowing funds to sidestep the process of buying or trying to match the performance of bonds in short supply, analysts said.

"It has to be easier for a portfolio manager to track this index if the smaller, less liquid names were removed," said Elisabeth Kashner, director of exchange-traded fund research at FactSet Research Systems Inc, adding that many portfolio managers "struggle to fully replicate their indexes."

The performance of at least hundreds of billions of investments are judged against the "Agg." Nearly $80 billion in ETFs track the index directly, according to Morningstar Inc, with investors increasingly buying relatively cheap funds that strive to mimic benchmarks, not beat the market.

The largest such funds include the $42 billion iShares Core U.S. Aggregate Bond ETF and the $32 billion Vanguard Total Bond Market ETF. Though both funds track Agg, neither must match the index's holdings exactly.

Josh Barrickman, Vanguard Group's Americas head of fixed-income indexing, said the asset manager may hold the smaller sets of bonds even as they leave the index "if we think they have value."

Karen Schenone, a fixed-income strategist at iShares, said she anticipates "minimal" activity as a result of the change.

The bonds set to be removed, including debt in the utilities, real-estate, energy and healthcare sectors, are selling off already, Bank of America Corp said in a research note.

Some investors avoid the U.S.-dollar, investment-grade index because of its extensive Treasury and mortgage-related holdings, which are especially likely to hemorrhage if interest rates move higher. U.S. Federal Reserve policymakers have telegraphed that they plan to hike rates three times this year.

In an additional nod to index funds, Agg owner Bloomberg L.P. will provide an additional closing price for the index at 4 p.m. ET, when many funds calculate their value.

The difference in bond prices between the index's 3 p.m. close and 4 p.m. means that index funds often report significantly different performance than their benchmark over short periods.

 

(Reporting by Trevor Hunnicutt; Editing by Paul Simao)

TAGS: Fixed Income
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