The Lehman Aggregate Bond Index, now known as the Barclays Capital Aggregate Bond Index, tracks the performance of most investment-grade bonds in the US, including government-backed and corporate bonds, and is weighted by market capitalization. Investors cannot directly invest in the index, but there are index-based funds available.
The Lehman Aggregate Bond Index is the former and better-known name for an investment-grade bond index of the United States. It is officially known as the Barclays Capital Aggregate Bond Index. As one of the best-known bond indices, it is used as the basis for several index-based funds.
The purpose of the Lehman Aggregate Bond Index is to track the performance of most investment grade bonds. These are bonds that meet a certain credit rating, primarily BBB- or higher from Standard and Poor’s. These ratings assess the likelihood that a bond issuer will default, which in turn affects the interest rate it has to offer to attract investors. Bonds that do not meet the minimum investment grade rating are commonly known as junk bonds.
The Lehman Aggregate Bond Index is a broad base index. This means that it covers all relevant stocks, rather than selecting those of the largest companies or a representative sample. It covers both government-backed bonds, such as most Treasury securities, and corporate bonds. For tax reasons, the index does not cover municipal bonds or inflation-protected Treasury securities.
The index is weighted by market capitalization. This means that the index is not calculated by simply averaging the price movements of each bond. Instead, the calculation gives a different emphasis, or weight, to the different links. This weighting is based on the bond’s market capitalization, which is the price of the bond multiplied by the number of bonds in issue, or the total market value of all bonds that are in issue. The larger its market capitalization, the greater the effect that price changes of a particular bond have on the index.
Investors cannot directly invest in the index itself. There is a wide range of exchange-traded and index funds that aim to track the index. This involves fund managers buying and selling shares so that the fund’s portfolio is proportional to the index. Because the fund is weighted by market capitalization, this generally means that fund managers will need to buy bonds that are rising in price and sell those that are falling in price. This may seem counterintuitive, but as long as the fund manager does it accurately, investors in the fund will make an overall profit if the index goes up.
The Lehman Aggregate Bond Index name was dropped after Lehman Brothers, which used to operate the index, collapsed in 2008. After the company’s bankruptcy, Barclays took over several of its assets, including its index operations. . The index was renamed the Barclays Capital Aggregate Bond Index.
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