After more than five and a half years, the Bloomberg U.S. Aggregate Bond Index (the “Agg”) is emerging from the most punishing drawdowns in its history. The recovery is certainly good news for investors that have bond allocations that track the Agg index.

However, we think important questions remain for these bond index investors, including those whose allocations are managed in a way that is “index aware.”

Before getting to those questions, let’s take a look at what happened with the index first.


The Agg’s Descent

The Agg’s performance peaked in August 2020, marking the end of a 40-year bull market in bonds. The index then posted a negative return in 2021. Its decline only gathered steam in 2022, posting its worst ever yearly loss of 13%. That’s also the first time that the Agg had back-to-back negative calendar year returns. At its lowest point, the Agg suffered a maximum drawdown of 18.4%.1 Despite positive returns since, the Agg has yet to recover from its decline. Through April 30, 2026, the Agg is still down 2.1% from its peak in August 2020.


Questions Worth Asking

If your fixed income allocation has tracked the Agg index fund since 2020, has it met your expectations for a bond allocation? And for those who have used an “index aware” approach since that time, it’s worth asking:

  • Performance: Did it outperform or underperform the Agg?
  • Maximum drawdown: How deep was your fund’s drawdown, and has your fund more than fully recovered?
  • Downside mitigation: Did your fund limit losses relative to the Agg and did it provide a smoother ride?
  • Diversification: Could your bond allocation have done more to diversify other holdings in your portfolio?


Next Steps

A bond allocation should help diversify equity exposure, provide portfolio stability and income. Based on your answers to the questions above, it may be time to consider an alternative approach to your bond allocation. Prepare for a turbulent market before one happens, not during one.
 

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1The Agg’s maximum drawdown of -18.4% occurred between 8/7/2020 and 10/24/2022.

RISKS AND DISCLOSURES:

An index is an unmanaged group of assets considered to be representative of a select segment or segments of the market in general, as determined by the index manager for the purposes of managing a specific index. You cannot invest directly in an index.

The Bloomberg Barclays US Aggregate Bond Index measures the performance of the total United States investment-grade bond market.

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