FOR INSTITUTIONAL INVESTOR USE ONLY

This site is for Institutional Investor use only and not for public use or distribution. The information contained on this site is for informational purposes only without regard to the investment objective, financial situation or specific needs of any particular investor. It is not intended for use by institutional investors in a jurisdiction where distribution or purchase is not authorized.

An “Institutional Investor” means any:

  • bank, savings and loan association, insurance company or registered investment company;
  • investment adviser registered either with the SEC under Section 203 of the Investment Advisers Act or with a state securities commission (or any agency or office performing like functions);
  • person (whether a natural person, corporation, partnership, trust or otherwise) with total assets of at least $50 million;
  • governmental entity or subdivision thereof;
  • employee benefit plan, or multiple employee benefit plans offered to employees of the same employer, that meet the requirements of Section 403(b) or Section 457 of the Internal Revenue Code and in the aggregate have at least 100 participants, but does not include any participant of such plans;
  • qualified plan, as defined in Section 3(a)(12)(C) of the Exchange Act, or multiple qualified plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans;
  • FINRA member or registered person of such a member; or
  • person acting solely on behalf of any such institutional investor.

By accessing this site you confirm that you are an Institutional Investor, you agree not to forward or make the contents of this site available to any person who is not an Institutional Investor, and you agree to be subject to Victory Capital’s user agreement

Redirect me to VCM.com

Thank you for your interest in Victory Capital Management. To download this document, please complete the registration form below. You will only need to complete this form one time to access site content.






  • Victory Capital may use my email to send out periodic news, announcements, and product information.

*All fields are required
Submit

Pairs well with…

Traditionally, the Bloomberg Barclays Aggregate Index (Agg) has been used as a proxy for the overall bond market—a little like an S&P 500 Index for the fixed income world. Many investors use the Agg as a benchmark to build a diversified fixed income portfolio because it includes a wide swath of securities, including Treasuries, mortgage-backed securities (MBS), asset-backed securities (ABS), and corporate securities, among others.

However, investors who rely on the Agg exclusively to guide their fixed income positioning might be limiting themselves or taking on more risk than they realize. In fact, we believe that adding a healthy allocation of short-term corporate bonds might go a long way to enhance the risk-adjusted return potential of a broader fixed income portfolio, while reducing interest rate risk over the long term.  

For starters, the Agg is heavily tilted toward U.S. government securities and MBS. Although this has always been the case, investors might not realize that the Agg has changed over the years and how much the index’s average duration, which is a measure of how sensitive a security is to changes in interest rates, has increased. The average duration of the Agg has gone from just over 4.9 a decade ago to approximately 6.2 at year-end 2020. 

In addition, the weighting of corporate bonds within the Agg has increased from approximately 25% at year-end 2019 to 27% as of the second quarter 2020. This reflects the very high level of new corporate issuance during this time and illustrates how trends in corporate finance can potentially alter the risk profile of a portfolio.

One possible strategic, long-term solution to improving the risk/reward profile of a bond portfolio is to include an allocation to short-term bonds, and in particular, corporate short-term bonds. We believe this provides two potential benefits: the ability to capture excess return (versus the risk-free rate, which is very low in this environment) while also lowering duration.¹ Pairing shorter-term corporate bonds with the Agg results in a higher Sharpe ratio² (which is a metric used to measure risk-adjusted returns—higher being better).

To demonstrate this, we looked back over 20 years and compared a pure Agg portfolio with a more diversified approach (one that pairs a 65% Agg portfolio with 35% short-term corporate bonds, represented by the Bloomberg Barclays U.S. 1-3 Year Credit Index.)

As the chart demonstrates, short-term corporate bonds appear to pair well with the Agg. The blended portfolio provides a higher excess return over time, along with lower standard deviations. Accordingly, such a portfolio produced superior risk-adjusted returns, as measured by Sharpe ratio.

2Q2020_ShortTermAgg-01
Index returns shown for illustrative purposes only. Indexes do not incur management fees or other expenses; one cannot invest directly in an index. 

As the chart demonstrates, short-term corporate bonds appear to pair well with the Agg. The hypothetical blended index portfolio provides a higher excess return over time, along with lower standard deviations. Accordingly, such a portfolio produced superior risk-adjusted returns, as measured by Sharpe ratio.

¹In comparison to the Agg duration of 6.04, the duration of the 1-3 Year Credit Agg was 1.92 at 6/30/20. 
²The Sharpe ratio is defined as the portfolio’s total return less the risk-free rate divided by the standard deviation of the portfolio’s total returns over time.  A higher ratio indicates better risk-adjusted portfolio returns. The average Sharpe Ratios were 0.17 for the Agg and 0.36 for the Hypothetical Blended Index Portfolio from 6-30-2000 to 6-30-2020.

Victory Capital, Inc. is a Registered Investment Advisor. The information in this article is based on data obtained from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations in this report are subject to change without notice and are not intended as individual investment advice. Not to be used as legal or tax advice. 

©2020 Victory Capital Management Inc. 

20200909-1321939

 

Consider the investment objectives, risks, charges and expenses of the funds carefully before investing. Download a prospectus or summary prospectus, if available, containing this and other important information for USAA Mutual Funds from www.usaa.com/prospectus, for Victory mutual funds from www.victoryfunds.com, or for VictoryShares and VictoryShares USAA ETFs from www.victorysharesliterature.com. Read it carefully before investing.

Investments involve risk including possible loss of principal. The value of the equity securities in which the fund invest may decline in response to developments affecting individual companies and/or general economic conditions. Dividends are never guaranteed. International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty, and greater volatility. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. You may lose money by investing. There are no guarantees the funds will achieve their investment objectives and strategies may be unsuccessful.

Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

ETFs have the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited and often commissions are charged on each trade, and ETFs may trade at a premium or discount to their net asset value. There can be no assurance that an active trading market for shares of an ETFs will develop or be maintained. The ETFs are not actively managed and may be affected by a general decline in market segments related to the Indexes. The ETFs invest in securities included in, the Index, regardless of their investment merits. The performance of the ETFs may diverge from that of the Indexes. 

LinkedIn, Twitter, and any other social media platform are owned by third parties unaffiliated with Victory Capital. Victory Capital is not responsible for the privacy or security policies at these sites or other third party sites to which they provide further links. For Victory Capital’s privacy policy, please visit the Policies page on www.vcm.com. Please do not post any information you wish to keep private on this page.

Judgments about a particular security, markets or investment strategy may prove to be incorrect and may cause an actively managed ETF to incur losses.


Victory Capital does not endorse and is not responsible for any ads, content, products, advice, opinions, recommendations or other material of third party sites that may be promoted via advertising within social media properties.

Content on Xchange, the Victory Capital Blog, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date posted and may change as subsequent conditions vary. The information and opinions contained in each post are derived from proprietary and non-proprietary sources deemed by Victory Capital to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such.  Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Victory Capital means Victory Capital Management Inc., the investment adviser of the Victory Capital mutual funds, USAA Mutual Funds, VictoryShares ETFs, and VictoryShares USAA ETFs. Victory Capital mutual funds and USAA Mutual Funds are distributed by Victory Capital Services, Inc. (VCS). VictoryShares ETFs and VictoryShares USAA ETFs are distributed by Foreside Fund Services, LLC (Foreside). VCS and Foreside are members of FINRA. VCS and Victory Capital are not affiliated with Foreside. USAA is not affiliated with Foreside, Victory Capital, or VCS. USAA and the USAA logos are registered trademarks and the USAA Mutual Funds and USAA Investments logos are trademarks of United Services Automobile Association and are being used by Victory Capital and its affiliates under license.

Find out more about the background of these firms on FINRA's BrokerCheck.

Nasdaq is a registered trademark of Nasdaq, Inc. and its affiliates (together,“Nasdaq”) and is licensed for use by Victory Capital. The product(s) are not issued, endorsed, sold, or promoted by Nasdaq. Nasdaq makes no warranties as to the legality or suitability of, and bears no liability for, the product(s). Nasdaq is not affiliated with a fund or advisor.

For specific questions about your account or other customer-service related inquiries, please contact Victory Capital directly.