Federal National Mortgage Association (FNMA): Surprise! You Probably Own Some of Verizon Communications Inc. (VZ)’s Bonds

That figure has come down slightly, as government borrowing has slowed and corporations have ramped up their debt issuance. Nevertheless, investors in the iShares Barclays Aggregate Bond Fund (NYSEARCA:AGG) and other funds that track the index have much more exposure to government debt than they did previously, and that has raised concerns about how vulnerable fund shareholders may be to rising interest rates that could affect government debt more than corporate debt.

Watch out for your ETFs
To see whether you’ll end up owning more Verizon bonds, you’ll need to look at how the particular index your bond fund tracks determines which debt to buy. For the popular iShares IBoxx $ Invest Grade Corp Bd Fd (NYSEARCA:LQD), which is a huge player in the bond ETF market with $17 billion under management, use the Markit iBoxx USD bond indexes, which rebalance every month. Other investors use the Barclays Corporate Index, which similarly should include Verizon’s debt by early October.

The size of Verizon Communications Inc. (NYSE:VZ)’s debt offering makes it a particularly noteworthy example of this phenomenon. But the concentration of debt from high-volume bond-issuers should give you equal cause for concern if you’re seeking a safe, diversified portfolio. With the structural elements of bond indexes supporting the counterintuitive weighting methodology, you have to be careful using index-tracking bond funds for your fixed-income exposure.

The article Surprise! You Probably Own Some of Verizon’s Bonds originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger owns warrants on JPMorgan Chase and Bank of America. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, General Electric, and JPMorgan Chase.

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