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.
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.