Heading into 2019, investors had plenty of concerns about the state of affairs in the corporate bond market, including investment-grade bonds. There has been ample talk about a raft of downgrades facing BBB-rated debt. That follows negative 2018 returns for many credit sectors, but defined-maturity exchange traded funds can help investors weather credit market volatility.
Defined-maturity ETFs only hold bonds that mature in a set year and distributes cash back to investors upon maturity. With target-maturity bond ETFs, investors can implement a type of bond ladder strategy that has evenly spaced out maturity dates to help minimize interest rate risk. Essentially, target-date bonds appeal to buy-and-hold investors who want a steady stream of income without the risk of losing their initial principal.
The $1.29 billion Invesco BulletShares 2021 Corporate Bond ETF (NYSEArca: BSCL) is a popular option among investment-grade defined-maturity ETFs.
“With uncertainty around rates, credit spreads and growth, investors may be inclined to look to defined-maturity bond funds,” said Invesco in a recent note. “Unlike traditional fixed income funds that tend to sell bonds before their maturity date, defined-maturity funds seek to hold securities through final maturity—at that time, investors can take the proceeds from the maturing bonds, or reinvest the proceeds in a different ETF with a new maturity date.”
BSCL ETF Benefits
While financial advisors and investors have implemented this strategy through individual debt securities, crafting bond ladders with individual bonds can be time consuming and cost prohibitive. Alternatively, investors can utilize target-date bond ETFs to easily create a bond ladder strategy.
“As BulletShares defined-maturity ETFs are available across the yield curve, investors can efficiently ladder a portfolio. A ladder is a portfolio of bonds that mature at staggered intervals across a range of maturities. Assuming rates rise, proceeds from each maturing rung of defined maturity ETFs can be reinvested in longer-dated funds at higher rates. If market interest rates fall or remain flat, fund holders can stay invested and take the proceeds when the funds mature,” according to Invesco.
BSCL, which rebalances monthly, holds over 400 corporate bonds. The fund has an effective duration of 2.20 years. Eighty-five percent of BSCL holdings are rated A or BBB.
For more on bond funds and strategies, please visit our Fixed Income Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. 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.