For the more conservative investor, target-maturity bond exchange traded funds help diminish volatility and better control rate risk in their fixed-income portfolios.
The iShares® iBonds® Mar 2020 Corporate ETF (NYSEArca: IBDC), which is part of the iShares iBonds fixed income suite, is a solid choice for bond investors that want to nail down a date for when their capital will be returned.
“At last report, the fund held 306 investment-grade bonds issued by highly rated companies, such as Apple, Bank of America and Verizon Communications, that all come due between April 1, 2019, and March 31, 2020. As the end date approaches, the fund will cease to exist and shell out the proceeds from its maturing bonds to investors,” reports Daren Fonda for Kiplinger’s Personal Finance.
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.
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.
IBDC’s “average duration is 3.5 years, suggesting that its price would slump by 3.5 percent if rates were to rise by one percentage point. If you had to unload the ETF before its maturity date, you might take a loss,” according to Kiplinger’s.
The ETF has a 30-day SEC yield and charges just 0.1% per year, or $10 for every $10,000 invested.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.