In contrast, other bond ETFs may rebalance on a regular basis, purchasing new bond issuance that have maturities that meet the ETF’s investment mandate and selling bonds that no longer meet the maturity requirements, which leave the ETF’s duration relatively consistent.
However, potential investors should be aware that laddered bond ETFs may replace securities that are called – an issuer can buy, or call, back callable bonds if the price exceeds a predetermined level, which typically occurs when interest rates decline, and then replace the bonds with a lower-yielding alternative. Additionally, companies may also refinance debt due to prolonged low interest rates. Consequently, these laddered bond ETFs may see their yields decline.
Additionally, if a bond matures, is called or is reeemed after the ETF’s final rebalancing date, investors may also not get back exactly their original principal plus interest since not all the debt securities are held to the ETF’s maturity, Boccellari added.
For more information on the fixed-income investments, visit our bond ETFs category.
Max Chen contributed to this article.