Portfolio perspectives

Choosing the right bond index for your portfolio: Universal versus Aggregate

For financial advisors, defining the role of bonds in a client’s portfolio is an important strategic decision that shapes risk and return characteristics. Striking the right balance between diversification and total return requires clarity on which benchmarks best reflect those objectives. Two widely followed indexes—the Bloomberg U.S. Aggregate and the Bloomberg U.S. Universal—offer distinct lenses for evaluating fixed-income exposure, each with implications for portfolio construction.

The Bloomberg U.S. Aggregate Index (the “Agg”) is the long-standing benchmark for investment-grade, U.S.-dollar-denominated, fixed-rate taxable bonds. It includes Treasuries, government-related and corporate bonds, agency mortgage-backed securities (MBS), asset-backed securities (ABS), and commercial mortgage-backed securities (CMBS). Importantly, it excludes high-yield and emerging-market debt, making it a conservative, core fixed income measure.

By contrast, the Bloomberg U.S. Universal Index builds on the Agg by adding U.S. high-yield corporates and dollar-denominated emerging-market bonds (Figure 1a). This broader composition introduces more credit risk but also higher income potential and fixed income diversification. Over time, these additional exposures have translated into stronger total returns and higher yields for the Universal Index compared to the Agg, particularly in credit-friendly environments. Historical data shows the Universal Index has outperformed the Agg on both an absolute and risk-adjusted basis over the past 35 years (Figure 1b),1 thanks to its inclusion of higher-yielding sectors and lower overall duration. These characteristics can give the Universal Index an edge for an advisor’s strategic allocation.

However, there are times when the Bloomberg U.S. Aggregate Index has been a better option. The Agg demonstrates its strength during periods of equity market volatility. When risk assets decline, investors typically seek high-quality fixed income, and the Agg’s substantial allocation to Treasuries and agency securities provides that defensive anchor. As shown in Figure 2, this positioning often results in outperformance relative to the Universal Index, reinforcing the Agg’s role as a stabilizing force within diversified portfolios. For investors prioritizing equity market diversification, the Agg remains a critical benchmark. Conversely, the broader opportunity set of the Bloomberg U.S. Universal Index may be a better choice for those with objectives centered on return enhancement and income generation.

In summary: the Agg delivers resilience when markets are under stress, while the Universal Index provides greater return potential in credit-friendly environments.

In deciding which approach—or which balance of approaches—suits your clients’ circumstances, you can consider these products for your portfolio construction toolkit:

Vanguard Core Bond ETF (VCRB) provides diversified exposure primarily to investment-grade U.S. bonds and uses the Agg as its benchmark. Vanguard Total Bond Market ETF (BND) gives broad exposure to the taxable investment-grade U.S. dollar-denominated bond market (excluding inflation-protected and tax-exempt bonds) and also tracks the Agg.    

Vanguard Core-Plus Bond ETF (VPLS) uses the Universal as its benchmark and provides diversified exposure primarily to investment-grade U.S. bonds with selective exposure to below-investment-grade bonds and debt from other countries, including emerging markets. Vanguard Core-Plus Bond Index ETF (BNDP) seeks to track the investment results of the Bloomberg U.S. Universal Float Adjusted Index using an optimized sampling indexing strategy.

Both the Agg and the Universal benchmarks are essential tools for portfolio construction, and advisors should align their selection with their clients’ risk tolerance and investment objectives.