As the Federal Reserve works on its eventual interest rate hike, fixed-income investors can still generate yields and diminish rate risk with target-date bond exchange traded funds.
With the Fed intent on hiking rates some time this year, investors can implement a bond laddering strategy through defined-maturity bond funds to hedge their fixed-income positions.
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]
These 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. As such, 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, since the bond funds would buy and sell debt securities to maintain their target strategy.
Using target-date bond funds, an investor could create a bond ladder strategy to help create a portfolio with varying maturity dates. The bonds’ maturity dates are evenly spaced across several years so that the proceeds from maturing bonds may be reinvested at regular intervals.
“If interest rates increase, an investor can reinvest the proceeds, if any, from maturing bonds at higher interest rates,” William Belden, Managing Director, Product Development at Guggenheim Investments, said in a note. “If interest rates decrease, the investor potentially benefits from price appreciation as the portfolio’s higher-yielding bonds increase in value.”