iShares Core Global Aggregate Bond UCITS ETF will finally break even from the end of 2021.

I wanted to use this blog post as an excuse to exercise some creativity with the color and find some not-so-boring color themes with Trading View. I rarely use the ability to set different layouts, but since I saw what my colleague Glenn can do with layouts, I thought about doing something with it, but in a strange way.

But the bulk of this post is about the standard Fixed Income index, the Bloomberg Global Aggregate Index.

I own the AGGU, or the iShares Core Global Aggregate Bond UCITS ETF USD Hedged Accumulate under the Daedalus Income portfolio, and also the other portfolio Crystalys. You can read my personal notes where I will group all the posts about Daedalus and Crystalys in the past.

The fund makes up 15% of Daedalus, which actually dropped to 13% as equity positions increased with growth and my injection of SRS alone over the last 2/3 years.

It is intended to:

1. Provide an expected return in the long term.
2. Earn some term and credit incentives.
3. Reduce portfolio volatility, especially while respecting an income portfolio. If you study the Safe Withdrawal Rate (SWR) framework for income, you will realize that the optimal portfolio is closer to a 75-80% equity allocation than a full 100% portfolio. Returns are not everything.

AGGU has been chosen so that everything falls into one account, namely an IBKR LLC account. This is for ease of management.

The Global Aggregate Bond index more or less broke after that nasty fall at the end of 2021. That was about five years ago.

The graph below shows the history of the AGGU:

Because AGGU is an accumulating class of fixed income ETFs, it takes into account the coupons the ETF earns, and what you see here is a total return. You might also see the labels in green that are my purchases from Daedalus and the orange one that is under Crystalys.

They are all around the same time period from August to December 2023.

This graph has been zoomed in more for a better view:

The chart looks like an obscene gain, but in reality it is only 13%.

So what you just observed is a 13% increase, a 13% increase, and then a 13% increase. for those who have invested since inception this will be a cumulative gain of 16%, but on an annual basis it is only 1.9%.

Looking at the chart, I wonder if it makes sense to buy the entire S$187,000 worth of AGGU at once. Sometimes it turns out afterwards that this may actually be the right conclusion, and usually it is actually the right conclusion. Unless the market is extremely volatile a year from now or a few years from now, you might realize that it doesn’t matter much if the market is spread out over a few months.

I have shown that I am also human. Some asked how I can completely transfer my portfolio to ETF. Well, you get part of the answer. You’ve just made a few purchases over the months.

The only reason why this ‘it doesn’t matter that much’ has worked for AGGU is that fixed income as a basket delivers a positive expected return if you respect the average duration of the portfolio. It’s unique that way.

Is 5 years a long time to break even?

One of the consistent messages in Investment Moats about fixed income is to think from a financial planning perspective and respect this [2 x Duration of the fixed income fund -1].

This determines whether you can achieve a return equal to the initial yield until maturity. It is not exact, but based on research. The research comes from this article: The initial (rolling) return predictions of bond portfolios with a constant maturity will yield best with double the maturity.

But indirectly, respecting this would also mean that Global Aggregate Bond is expected to always remain positive in the longer term.

The effective duration of AGGU is 6.2, which means that in some hairy situations (which I think is one of the hairiest, if not the hairiest), you can expect this to recover within 6 years.

Recovery in five years is therefore not unexpected.

Would I have implemented AGGU in another parallel universe by the end of 2021?

But recovery is one thing. Most would say, “I risk so much of my money, and then five years later you tell me I’m just breaking even. Why is this a great investment?”

First, you better check if I ever use the word excellent investment for something like this. The beauty of the Global Aggregate bond is that its volatility is low compared to stocks, and the overall volatility of the portfolio is reduced, making the overall portfolio more viable to own. At the same time, you achieve a better return because the term is longer and the credit quality is poorer.

Using that equation, to lock in the return we have to hold it for 11.2 years, which means that’s the next 6.2 years where it’s trying to offset the 3-6% per year returns.

That research is not wrong, but keep in mind that the yield to maturity of the Global Aggregate bond at the end of 2021 should be on the low side.

The chart below shows the return on a basket of higher quality eight-year corporate bonds:

FRED details here

I looked at the current yield to maturity of the Global Aggregate (3.46%) and it is 1% lower than what is shown in this chart.

At the time, the yield to maturity of this index may have been closer to 2.3%, so the Global Aggregate yield to maturity at the time may have been closer to 1.3%. This means that if you held it for 11.2 years, you would earn about 1.3% per year.

It is not easy to obtain historical graphs or data on the history of global bond yields to maturity. Here is for the US total bond (not global):

The US Aggregate Bond is trading 80 bps higher than the Global today. WisdomTree’s graph will probably show you where the max and min have been over the past 10 years.

I wonder if something were to hit me, and I decide to move everything to ETFs in 2021, if I would have implemented all $187,000 at a yield to maturity of 1.3%.

Most likely I won’t do that honestly as, if I understand what this means, it’s the same as buying into MSCI World at a price-to-earnings ratio of 40 times.

Someone with a values ​​philosophy like me would find it challenging because you know you tend to buy something that is the most expensive relative to the historical.

For this to work well (still in the stock example), a lot of things have to go right. You could compare the current equity environment to that, and I think that’s what the current equity environment is. Profit margins and earnings per share should support this valuation. Can’t go wrong and if it goes wrong the market will adjust pricing (down)

I am aware that with a yield to maturity of 1.3 for an eight-year and six-year investment-grade portfolio, this tends towards the upper end of valuation compared to history.

It would be extremely uncomfortable.

I can respect the intellectual part of portfolio implementation, but in my philosophy I would always have a valuation layer in my system (which explains the lack of index funds in my portfolio).

How attractive is the global joint bond now?

I want to paste these two diagrams here so you don’t have to scroll:

And these are the current portfolio features of the Global Aggregate Bond:

The longer spot yields for high quality 8-year corporate bonds could help you contextualize where we are relative to history.

We roughly go back to the revenues from 2000 to 2008.

Historically, returns are neither expensive nor cheap.

That was my conclusion in 2023, and it remains the case today.

And then if I’m comfortable implementing it, today isn’t bad either.

But I really don’t understand people. I think people are in a phase where they are reaching for long-term bonds (fixed income securities with longer durations) and credits (fixed income securities of lower quality).

They were surprised that interest rates could fall so quickly.

In early 2025, something like an AGGU will be hard to sell:

1. Past returns look so bad.
2. Short term rates are better.

If you continue to invest in the rearview mirror, especially in fixed income, and don’t have a longer-term strategy, you will find yourself doing this for the next 40 years.

I think you have to have a financial planning lens for fixed income and not always look at returns. You need to think about whether you want scary episodes where you wonder if some of your bonds will go bankrupt, if you’ll get enough returns, if you want to go in and out so often.

The Global Aggregate Bond is ideal if you have a goal that is 10 years away and you want a lot of certainty and do not invest in shares.

If it is shorter, you have to accept a few things:

1. Some setback.
2. Potentially just break even.
3. Possibly a good return.

The ‘not investing in equities’ comes into play here, because if you are a more speculative equity investor, or a long-term investor with a tactical sleeve, or just with itchy fingers, then a shorter-term fixed income fund might suit you better.

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Kyith is the owner and sole writer behind Investment Moats. Readers tune in to Investment Moats to learn and build stronger, more solid wealth foundations, how to pursue a passive investing strategy, learn about investing in REITs, and the basics of active investing.

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Kyith worked as an IT Operations Engineer from 2004 to 2019. He currently works as a Senior Solutions Specialist at Insurance Start-up Havend. All opinions expressed on Investment Moats are his own and do not represent the views of Providend.

You can view Kyith’s current portfolio herewho uses his Free Google Stock Portfolio Tracker.

His favorite investment broker is Interactive real estate agentsallowing him to invest in securities from various stock exchanges around the world, at very low commission rates, without custody fees, near spot currency rates.

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