Equity vs Bond Indices

A Case for Active Management in Fixed Income? 

November 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Bond indices are frequently portrayed as featuring a lower quality composition than equity indices
  • Analysing equity and bond indices in the US and emerging markets confirms this view
  • Perhaps this explains why there is some alpha generation in fixed income   


While almost all fund managers in equities across market segments underperform their benchmarks over time, the data for fixed income fund managers is more diverse and highlights pockets of alpha generation. For example, in the decade from 2008 to 2018, 80% of the fund managers focused on long-term US investment grade bonds underperformed their benchmark, but only 43% of the managers trading short-term bonds, according to the S&P SPIVA Scorecard for 2018.

A popular theory for higher alpha generation in fixed income over equities is a different index composition, which is as follows: In both asset classes, indices are typically created by ranking the universe of securities by their size and weighting these accordingly. In equities, this leads to companies dominating the index that have the best outlook in terms of growth, profitability, or both. In contrast, the largest weights in fixed income indices are from corporates or sovereigns that issue the most debt, which can be a reflection of low quality. Stated differently, stocks are weighted by investors while bonds are weighted by issuers.

However, this theory can be challenged as the amount of outstanding debt often relates to the size of the country, which is not a metric for measuring quality. For example, Greece has a much higher debt-to-GDP ratio than Germany, but the outstanding government debt of the Republic of Germany is more than five times the amount of the Hellenic Republic’s on an absolute basis.

In this short research note, we will compare the composition of stock and bond indices in the US and emerging markets.


First, we analyse equity, corporate and high yield bond indices in the US by extracting data from ETFs that track benchmark indices like the S&P 500. A breakdown by sectors highlights significant differences in the portfolios. Specifically, equities are currently dominated by technology stocks, corporate bonds by financials, and