For the more conservative investor, target-maturity bond exchange traded funds help diminish volatility and better control rate risk in their fixed-income portfolios.
ETFs provide a plethora of investment strategies and have characteristics that make them well suited for long-term passive investors, writes Sheyna Steiner for Bankrate.
With interest rates set to rise as the Federal Reserve contemplates hiking interest rates to rein in inflation, investors can implement a bond laddering strategy through defined-maturity bond funds to hedge their fixed-income portfolios.
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.
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). [Where Defined-Maturity ETFs Fit Into A Fixed-Income Portfolio]
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). [BlackRock Expands Bond ETF Lineup With 7 Defined Maturity Funds]
They’re very useful for “targeting specific points in the yield curve in particular,” CFP professional Peter Lazaroff, CFA, portfolio manager at Acropolis Investment Management, said in the Bankrate article.