Pig in the Poke? Why It’s Time to Bag the Agg

rick roche“Pig in a poke” is an English idiom first used in the Middle Ages.1 It is a deceptive trick or a “blind bargain.” Across the pond, many folks bought the poke without looking inside. Some people thought they were buying pork or a small pig and were surprised to find they had been sold something entirely different. Tens of millions of unsuspecting investors whose fixed income portfolios are tied to the Bloomberg US Aggregate Bond Index – colloquially called the “Agg” – are in the same boat. They (and sadly too many of their advisors) haven’t looked inside this antiquated index. These investors will suffer from the “Agg drag.”

The Agg is supposed to be to bonds what the S&P 500 Index is to equities. But it doesn’t live up to that promise. The Agg has drawn criticism from major investors and analysts who view it as an insufficient gauge for measuring the bond universe.

Although it is not possible to directly invest in an index, there are trillions of dollars indexed to the Bloomberg U.S. Aggregate Bond Index.2 According to Morningstar, in 2017, there were 460 mutual funds that used the Agg as their benchmarks, with a combined $1.2 trillion in assets under management (AUM).3 Two of the largest passive index funds benchmarked to the Agg are the iShares U.S. Aggregate Bond Index ETF and the iShares U.S. Aggregate Bond Index Mutual Fund with a combined $115 billion in AUM (as of 07/28/23).