Where Defined-Maturity ETFs Fit Into A Fixed-Income Portfolio | ETF Trends

Fixed-income investors who are adhering to a specific investment timeline can utilize target-maturity exchange traded funds to meet their goals.

For instance, Guggenheim Investments has a suite of “BulletShares” defined-maturity bond ETFs, including a range of corporate bond options for years up to the Guggenheim BulletShares 2024 Corporate Bond ETF (NYSEArca: BSCO) and a group of high-yield options for years up to the Guggenheim BulletShares 2022 High Yield Corporate Bond ETF (NYSEArca: BSJM).

Additionally, BlackRock’s iShares also offers a suite of target-date corporate and muni bond ETFs that mature up to the iShares iBonds Sep 2020 AMT-Free Muni Bond ETF (NYSEArca: IBMI), iShares iBonds Mar 2023 Corporate ETF (NYSEArca: IBDD) and iShares iBonds Mar 2023 Corporate ex-Financials ETF (NYSEArca: IBCE). The ETF provider recently closed its broader Target Date ETF line on October 15. [iShares Will Close 18 ETFs]

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.

“If the investor buys a traditional bond mutual fund or ETF, she runs the risk of not getting back her original investment because of potential interest-rate movements that could push bond prices lower,” writes Morningstar analyst Thomas Boccellari.

Consequently, investors who want better control over their fixed-income assets can use these types of ETFs in a laddered bond investment strategy where they will receive the principle back on a predetermined schedule. For instance, BSCO would only invest in corporate bonds that mature in 2024, and at maturity, the fund’s assets are returned to investors.