Bond Index Funds - A Duration Approach

Index funds can be used by investment managers as a method of ensuring that their portfolio performs as well as the general market. Methods have been proposed for creating index funds for the stock market, and in this paper a method for creating an index fund for a sector of the bond market is suggested. The underlying indexing mechanism uses the duration moments of the portfolio to capture the various aspects of the sector and its response to changes in the yield curve. The initial results suggest that a relatively small basic set of bonds can be used to model the movements of a particular market segment.