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.
Drummond Osborn, president of Osborn Wealth Management, also believes that fixed-maturity bond ETFs offer the best of both individual bonds and actively managed bond funds as the strategies provide the diversification benefits of bond funds with lower interest rate risk associated with individual bond securities.
Because the individual bonds which comprise the ETF all mature within the same calendar year, an investor has a greater sense of the amount of principle being returned,” Osborn said.
In comparison, diversified bond funds have no set maturity date and constantly sell holdings set to mature and buy longer dated bonds to achieve their target strategy. Consequently, these diversified bond funds come with duration risk where funds with longer durations could see prices significantly decline if interest rates were to rise.
However, the maturity-date ETFs may trade at a premium and show light volume, so investors should be aware they could overpay for the investments. Osborn suggests using limit orders to better control trade executions.
For more information on fixed-income assets, visit our bond ETFs category.
Max Chen contributed to this article.