Investors are moving away from bond assets as duration risk mounts with interest rates rising and ongoing Fed “tapering” concerns. However, “target-maturity” bond exchange traded funds are holding strong in the fixed-income space.
Since the middle of May, target-maturity bond funds saw $174 million in net inflows, reports Murray Coleman for the Wall Street Journal. Meanwhile, bond ETFs experienced $6.7 billion in outflows, according to XTF data. [Limit Interest Rate Exposure with Defined-Maturity Bond ETFs]
“With interest rates at historic lows, people are concerned about buying traditional bond funds that can lose their principal. They’re looking for alternatives,” Michael McClary, chief investment officer at ValMark Advisers, said in the article.
Larger bond ETFs typically hold a basket of bond securities with varying maturities and re-allocates to once a bond matures. Target-maturity ETFs, on the other hand, only hold bonds that mature in a set year and distributes cash back to investors upon maturity.
Additionally, with target-maturity bond ETFs, advisors can implement a type of bond ladder strategy that has evenly spaced out maturity dates to help minimize interest rate risk.