Bond indexing

Describe two advantages and two disadvantages.

Is this a fair question?

Every question is fair.

Advantages - Low fees, low tracking error

Disadvantages - Difficult to implement, lower expected return than the index


  • low fees
  • produces diversified portfolios
  • manager does not have too much leeway in security selection (so fund manager/sponsor has more control).
  • possibility of underperformance at a given level of risk is low.


  • may be able to produce more risk with an active portfolio at lower risk.
  • may end up having a portfolio that does not meet client objectives / liability requirements
  • may not be able to invest in securities that provide more returns.

Hard to imagine seeing such an open-ended question like this on the AM section. They would have to at least give you some kind of clue as to what type of bond indexing we are talking about. Then you could at least limit your answers.

But I could easily picture this kind of vague question showing up on the PM section.