Factor Exposure Analysis 120: Risk & Return Contribution Analysis of Fixed Income Strategies

Bonds provide uncorrelated returns to stocks, right?

August 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Fixed income markets are diverse, and so are their risk & return drivers
  • Contribution analysis helps identify hidden risks
  • Many bond types are unattractive given high correlations to equities

INTRODUCTION

iShares’ Core U.S. Aggregate Bond ETF (AGG) is the largest bond fund, with $140 billion in assets, and a cornerstone holding in traditional equity/bond portfolios. Yet most investors would likely struggle to say precisely what AGG holds. The consensus guess would be “U.S. investment-grade bonds” – but what does that actually mean in practice?

AGG allocates 46% to U.S. Treasuries and 21% to agency mortgage-backed securities, with the remainder split across corporate bonds and smaller sleeves in other fixed income sectors. In total, the portfolio holds more than 13,000 securities. This makes it a reasonable proxy for the U.S. investment-grade bond market as a whole, but it also illustrates just how heterogeneous that market is.

However, AGG can also be challenged in that, given its broad universe, it is not as uncorrelated to equities as commonly perceived, and therefore provides less diversification benefit than commonly assumed.

In this research report, we analyze the various segments of the fixed-income universe using risk and return contribution analysis.

FIXED INCOME MARKET SEGMENTS

The fixed income market is diverse, and we focus on 11 segments: EM local currency-denominated bonds, TIPS, T-Bills, mortgage-backed securities (MBS), floating-rate bonds, long-term Treasuries, IG corporate bonds, EM USD-denominated bonds, preferreds, high yield bonds, and private credit.

We use the largest ETFs trading in the U.S. that provide exposure to each strategy and compare them based on their yields, the core reason for buying bonds in the first place. EM local bonds currently offer the lowest yield, and private credit the highest. The former may be surprising and is explained by exposure to low-yielding sovereign debt from countries like China, Thailand, and Poland.