Types of Fixed-income Indexes

AnalystPrep Summary

Fixed-income indexes track the performance of groups of bonds and serve as benchmarks for portfolio managers and investors. They can represent broad bond markets or focus on specific sectors, credit qualities, maturities, geographic regions, currencies, or ESG criteria.

Unlike equity indexes, bond indexes typically contain many more securities because one issuer may have multiple bonds outstanding. Fixed-income indexes also experience higher turnover because bonds mature, are called, or no longer meet index criteria. Many broad bond indexes are weighted based on the market value of outstanding debt rather than company market capitalization.

For CFA Level I candidates, the key is to understand how fixed-income indexes are constructed, how they differ from equity indexes, and how investors use them as benchmarks.

Key Takeaways

• Fixed-income indexes benchmark bond market performance.
• Bond indexes usually contain significantly more securities than equity indexes.
• Bond indexes experience higher turnover because bonds mature.
• Most broad bond indexes are weighted by the market value of outstanding debt.
• Indexes may focus on sectors, maturity, credit quality, geography, currency, or ESG characteristics.
• Portfolio managers use bond indexes for benchmarking and passive investing.
• Aggregate indexes track broad bond markets, while narrower indexes focus on specific market segments.

Types of Fixed-Income Indexes at a Glance

Understanding Types of Fixed-Income Indexes

Fixed-income indexes help investors measure the performance of bond markets and provide benchmarks for evaluating investment portfolios. Because the global bond market contains many securities with different issuers, maturities, credit ratings, currencies, and structures, indexes simplify performance measurement and portfolio construction.

Some fixed-income indexes represent broad bond markets, while others track specific sectors such as government bonds, corporate bonds, high-yield bonds, emerging market debt, inflation-linked bonds, or ESG-focused bonds.

In this study note, you’ll learn:

• Why fixed-income indexes exist
• How bond indexes differ from equity indexes
• The major types of fixed-income indexes
• How indexes are constructed and maintained
• Why fixed-income indexes are used as benchmarks
• The role of ESG in bond indexing
• Common CFA exam applications

Why Fixed-Income Indexes Matter

Fixed-income indexes provide a standardized way to evaluate bond market performance and compare investment strategies. They help investors understand how different segments of the bond market behave under changing economic conditions and serve as benchmarks for actively managed funds, ETFs, and institutional portfolios.

Understanding how bond indexes are constructed is essential for evaluating performance and selecting appropriate investment benchmarks. A portfolio that invests in emerging market sovereign bonds, for example, should not usually be compared with a broad investment-grade corporate bond index.

For CFA candidates, fixed-income indexes connect benchmark selection, market segmentation, risk measurement, and portfolio performance evaluation.

What Are Fixed-Income Indexes?

Fixed-income indexes are pivotal in tracking the broad risk and return of bond markets. They serve to evaluate market performance, benchmark the performance of investments and investment managers, and lay the foundation for indexed investment strategies.

How Do Fixed-Income Indexes Differ from Equity Indexes?

While they share similarities in function with equity indexes in stock markets, fixed-income indexes have distinct characteristics that set them apart.

Fixed-income indexes differ from equity indexes because bonds have different structural features from common stocks.

A single company usually has one main common stock, but the same issuer may have many bonds outstanding with different maturities, coupons, currencies, credit ratings, and covenants. This means fixed-income indexes often contain many more securities than equity indexes.

Bond indexes also experience higher turnover because bonds mature, are called, or no longer meet index rules. Equity securities do not mature, so equity index turnover is often driven more by market capitalization, liquidity, sector classification, or index eligibility rules.

Fixed-income indexes may also be harder to replicate because many bonds trade less frequently than stocks. This can create pricing challenges, liquidity differences, and higher replication costs for passive bond portfolios.

What Makes Fixed-Income Indexes Unique?

1. Multiplicity of SecuritiesA unique aspect of the fixed-income market is that a single issuer can have multiple securities. This leads to fixed-income indexes having a larger number of constituents compared to equity indexes. In fact, certain indexes can have over 10,000 constituents.
2. High TurnoverThe inherent nature of bonds, with their finite maturity and the frequent introduction of new issuances, results in a higher turnover for fixed-income indexes. A common practice is the monthly rebalancing of these indexes to accommodate new issues and phase out those nearing maturity.
3. Weighting MechanismIn a manner similar to equity indexes, which are weighted by issuers’ market capitalization, bond indexes typically weigh constituents based on the market value of outstanding debt. This means that broad bond indexes can undergo changes over time, reflecting shifts in the bond market landscape, such as the balance between public and private issuer debt, changes in maturity lengths, and shifts in credit quality. A notable observation is the significant weightage of government debt in many broad bond indexes attributed to the substantial issuance volume by government entities.

What Are the Different Types of Fixed-Income Indexes?

1. Aggregate Indexes: Characterized by a vast array of constituents.
2. Narrower indexes: These are more refined, drawing criteria such as sector, credit quality, maturity duration, geographical focus, and ESG considerations.

It is imperative that the chosen index resonates with the investment strategy of the fund or manager in question.

Fixed-income indexes may be classified in several ways depending on the market segment they are designed to track.

Common classifications include:

• Market sector indexes: Track government bonds, corporate bonds, securitized bonds, or municipal bonds.
• Credit quality indexes: Track investment-grade bonds, high-yield bonds, or specific rating categories.
• Maturity indexes: Track short-term, intermediate-term, or long-term bonds.
• Geographic indexes: Track domestic, regional, global, or emerging market bonds.
• Currency-based indexes: Track bonds denominated in a specific currency.
• Inflation-linked indexes: Track bonds whose principal or coupons are linked to inflation.
• ESG indexes: Track bonds that meet environmental, social, and governance criteria.

Why Do Investors Use Fixed-Income Indexes?

Fixed-income indexes are widely used by institutional and individual investors to measure bond market performance, benchmark actively managed portfolios, and construct passive investment products such as bond index funds and exchange-traded funds.

Portfolio managers use bond indexes to evaluate whether their portfolios are outperforming or underperforming a relevant benchmark. Investors also use indexes to understand how different segments of the bond market perform over time, including government bonds, corporate bonds, emerging market debt, high-yield bonds, and ESG-focused bonds.

Fixed-income indexes also support asset allocation decisions because they help investors compare exposure across maturity, credit quality, sector, geography, and currency.

Examples of Popular Fixed-Income Indexes

1. Bloomberg Barclays Global Aggregate Index:The inclusion criteria is summarized below:
   1. Issuers: Fixed-rate bonds from various entities, including sovereign, government, corporate, and securitized issuers from both developed (DM) and emerging (EM) markets.
   2. Currencies: Encompasses 28 currencies from the Americas, EMEA, and Asia Pacific.
   3. Credit quality: Must have an investment-grade rating or its equivalent.
   4. Maturity: Bonds should have at least a year to final maturity or an average weighted maturity.
   5. Rebalancing: Done monthly, adjusting for new issues and removing bonds that no longer meet criteria.
2. J.P. Morgan Emerging Markets Bond Index Plus (EMBI+):The inclusion criteria is summarized below:
   1. Issuers: Focuses on emerging market sovereign entities issuing US dollar debt.
   2. Currencies: Only includes US dollar-denominated bonds.
   3. Credit quality: Bonds rated Baa1/BBB+/BBB+ or below by major rating agencies.
   4. Maturity: Considers bonds with at least 2.5 years to maturity, excluding those falling below a 12-month maturity in the upcoming month.
   5. Rebalancing: Done on the last US business day of each month.
   6. Characteristics: This index zeroes in on US dollar–denominated debt from sovereign governments with a specific credit quality, targeting higher returns than developed market sovereign bonds.
3. Bloomberg Barclays MSCI Euro Corporate Sustainable SRI Index:The inclusion criteria is summarized below:
   1. Issuers: Corporate entities like industrial, utility, and financial institutions.
   2. Currencies: Only includes euro-denominated bonds.
   3. Credit quality: Bonds rated Baa3/BBB-/BBB- or above by major rating agencies.
   4. Maturity: Bonds with at least a year to final maturity are considered.
   5. Rebalancing: Done on the last US business day of each month.
   6. ESG rules: Bonds must have an MSCI ESG rating of BBB or higher and exclude issuers involved in certain business activities or controversies.

The Bloomberg Global Aggregate Bond Index is a broad fixed-income benchmark that tracks global investment-grade debt across multiple markets and currencies. It is widely used by institutional investors and portfolio managers who need a broad measure of global bond market performance.

The J.P. Morgan EMBI+ Index tracks emerging market sovereign bonds and is commonly used as a benchmark for emerging market debt strategies.

The Bloomberg MSCI Euro Corporate Sustainable SRI Index applies ESG-related screening criteria to euro-denominated corporate bonds, making it relevant for investors seeking sustainable fixed-income exposure.

How Are ESG Factors Incorporated into Fixed-Income Indexes?

ESG-focused bond indexes adopt a rigorous screening process to exclude issuers that don’t meet certain ESG benchmarks. This can involve filtering out issuers engaged in specific business activities or those that don’t achieve the required ESG ratings.

Question 1

Which feature best distinguishes fixed-income indexes from equity indexes?

1. Fixed-income indexes are weighted by issuers’ market capitalization.
2. A single issuer in the fixed-income market can have multiple securities.
3. Fixed-income indexes have fewer constituents than equity indexes.

Solution:

The correct answer is B: One unique aspect of the fixed-income market is that a single issuer can have multiple securities, leading to fixed-income indexes having potentially many constituents.

A is incorrect: Both equity and fixed-income indexes can be weighted by market capitalization or the market value of outstanding securities.

C is incorrect: Fixed-income indexes can have a larger number of constituents compared to equity indexes, with some having over 10,000 constituents

Question 2

Which index would most likely exclude issuers involved in the alcohol and tobacco industries due to ESG considerations?

1. Bloomberg Barclays Global Aggregate Index
2. J.P. Morgan Emerging Markets Bond Index Plus (EMBI+)
3. Bloomberg Barclays MSCI Euro Corporate Sustainable SRI Index

Solution:

The correct answer is C: The Bloomberg Barclays MSCI Euro Corporate Sustainable SRI Index has ESG rules that exclude issuers involved in certain business activities, including alcohol and tobacco.

A is incorrect: The Bloomberg Barclays Global Aggregate Index does not specifically mention excluding issuers based on ESG considerations related to alcohol and tobacco.

B is incorrect: The J.P. Morgan EMBI+ does not specifically mention ESG considerations in its criteria.

Glossary

Fixed-Income Index — A benchmark that tracks the performance of a group of bonds or fixed-income securities.

Aggregate Bond Index — A broad index that tracks multiple segments of the bond market.

Broad Market Index — An index designed to represent a wide portion of a financial market.

Bond Benchmark — A fixed-income index used to evaluate portfolio performance.

Outstanding Debt — The total amount of debt securities issued by a borrower that remains unpaid.

Market Value Weighting — An index weighting method based on the market value of securities outstanding.

Rebalancing — The process of updating an index by adding, removing, or reweighting securities.

ESG Index — An index that applies environmental, social, and governance criteria.

Emerging Market Bond Index — An index that tracks debt issued by emerging market governments or companies.

Investment-Grade Bond Index — An index that tracks bonds with relatively higher credit ratings.

Frequently Asked Questions

What is a fixed-income index?

A fixed-income index is a benchmark that tracks the performance of a group of bonds or fixed-income securities.

How are fixed-income indexes different from equity indexes?

Fixed-income indexes usually include more securities and have higher turnover than equity indexes because bonds mature and issuers often have multiple bonds outstanding.

What is an aggregate bond index?

An aggregate bond index is a broad benchmark that tracks multiple segments of the bond market, such as government bonds, corporate bonds, and securitized debt.

Why do fixed-income indexes have higher turnover?

Fixed-income indexes have higher turnover because bonds mature, are called, or no longer meet index eligibility rules.

How are bond indexes weighted?

Many broad bond indexes are weighted by the market value of outstanding debt. Issuers with more debt outstanding may therefore have larger index weights.

What is the Bloomberg Global Aggregate Bond Index?

The Bloomberg Global Aggregate Bond Index is a broad benchmark used to track global investment-grade fixed-income markets.

What is the J.P. Morgan EMBI+ Index?

The J.P. Morgan EMBI+ Index tracks emerging market sovereign bonds and is commonly used as a benchmark for emerging market debt strategies.

Why are ESG bond indexes becoming more popular?

ESG bond indexes are becoming more popular because some investors want fixed-income exposure that also reflects environmental, social, and governance criteria.

Summary of Fixed-Income Index Types