For the more conservative investor, target-maturity bond exchange traded funds help diminish volatility and better control rate risk in their fixed-income portfolios.
The iShares® iBonds® Mar 2020 Corporate ETF (NYSEArca: IBDC), which is part of the iShares iBonds fixed income suite, is a solid choice for bond investors that want to nail down a date for when their capital will be returned.
“At last report, the fund held 306 investment-grade bonds issued by highly rated companies, such as Apple, Bank of America and Verizon Communications, that all come due between April 1, 2019, and March 31, 2020. As the end date approaches, the fund will cease to exist and shell out the proceeds from its maturing bonds to investors,” reports Daren Fonda for Kiplinger’s Personal Finance.
Defined-maturity bond funds typically buy bonds that mature in the year the ETF will terminate, ensuring that investors can collect the bonds’ face value at maturity, along with a steady income stream along the way. Investors are meant to buy-and-hold these securities until maturity. In contrast, a regular bond ETF runs the risk of losing its original principal if interest rates go up, depending on the bond ETF’s effective duration.
Because the individual bonds which comprise the ETF all mature within the same calendar year, an investor has a greater sense of the amount of principle being returned,” Osborn said.