The advent of the latest bond focused exchange traded funds (ETFs) have brought the spotlight on bond funds and possible shortcomings.
A long-standing criticism of bond funds is that these investments never mature and so investors can’t lock in attractive yields as they can with individual bonds. Ian Salisbury for The Wall Street Journal reports that two ETF providers, iShares and Guggenheim, have begun offering “end-date” or “bullet” bond ETFs in the past year. The new funds hold a portfolio of bonds all maturing in the same year. [New ETFs: Brazil Bonds and Inverse Treasuries.]
The ETFs are designed to terminate once the bonds principal is returned, so the holdings do not continue to roll over. ETF investors are able to secure or lock in yields at the time they buy. Many fixed-income investors hold bonds simply to smooth the volatility of a portfolio of long-term stock holdings, and the idea that the amount made is known helps make planning for things easier, such as retirement or college tuition. [Corporate Bond ETFs Catch A Wave.]
The new bond ETFs indeed allow investors to fix a certain yield at the time they buy–that is, to gauge the total amount of money they will receive in the target year, counting regular distributions that are paid each month and the final distribution when the fund liquidates. However, because fund investors can cash in and out, the complexion of the funds’ investment portfolios can change over time, and the breakdown between these two sources of investment return can shift.
It’s important to keep in mind also, that investors in traditional bond funds, do earn a yield, it’s just not a fixed yield.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.