To take advantage of these higher yields and to reduce our underweight to interest rate sensitive assets within our diversified asset allocation portfolios, our preferred approach is to allocate to a core bond fund or ETF. We believe a core bond fund (versus a core plus or multi-sector bond fund) provides more reliable ballast to equity positioning while also being able to take advantage of higher yields.

The intermediate core bond and core plus bond categories represent the two most popular categories by assets under management (AUM) and represent 45% of all asset across the taxable bond open-ended mutual fund space (as of August 2022). But what’s the difference between core and core plus? What does “plus” really mean? In simplest terms, “plus” indicates a more flexible investment mandate across fixed income markets. Core plus bond funds have more latitude to invest in out-of-benchmark (i.e., Bloomberg US Aggregate Index, “Aggregate index”) sectors, in lower quality bonds, and often have more discretion to make meaningful rate calls relative to the index.

Core plus bond funds often have more exposure to emerging market bonds, developed international bonds, high-yield credit, and securitized credit. This results in less exposure to U.S. Treasuries, agency mortgages, and investment-grade corporate bonds that comprise the Aggregate index. While both core and core plus funds focus on investment grade (IG) rated bonds, by definition, core bond funds hold less than 5% of net assets in below IG rated bonds (on average, less than 2% over the last 36 months). Core plus funds typically have the flexibility to hold well above that 5% threshold (over 20% in sub-IG is not uncommon).

Analyzing monthly statistics over the trailing 36 months for both core and core plus bond funds, core plus bond funds have a higher standard deviation, meaning core plus bond funds tend to be more volatile. Part of that volatility comes from a more actively managed interest rate process, which may result in larger divergences from the index. Additional volatility comes from owning fixed income sectors that may act like equities during economic slowdowns. By contrast, core bond funds generally offer diversified bond exposure that more closely tracks the Aggregate index, which is the index that has historically held diversifying properties to offset equity risks.


This year will go down as the worst year for bonds in the history of the Aggregate bond index, but with higher yields, we think the prospects for fixed income have improved. Not only have the income opportunities increased, we think the diversifying properties of bonds have increased as well. Clearly, bond diversification has not worked this year. But, with the Fed committed to staving off continuing inflationary pressure—even at the expense of an economic contraction—we think bonds have the opportunity to act like bonds again and provide the ballast for equities within a diversified asset allocation. As such, the Strategic and Tactical Asset Allocation Committee here at LPL Research has recently voted to neutralize the interest rate sensitivity in our bond portfolios, relative to our indexes, to take advantage of higher yields.

Please contact me if you have any questions or need assistance.


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

All index data from FactSet.

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