Invesco, the fourth-largest U.S. exchange traded funds issuer, via its BulletShares suite, is also one of the largest issuers of defined maturity ETFs.
Also known as target maturity funds, 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 BulletShares ETF suite tries to combine the advantages of ETF investing with the benefits of individual debt exposure, including the potential ability to match income with future cash-flow needs. The BulletShares ETFs are designed to offer income-seeking investors an easily accessible means of building or managing a laddered income stream.
“Investors who hold a bond to maturity have locked in their total return, subject mainly to the risk of default. Now, they must consider how to mitigate that default risk: How many different bonds should they own to diversify their portfolios against an economic downturn that weighs on companies’ ability to repay their debts?,” said Invesco in a recent note.
Defined Maturity 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.
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 typical bond funds would buy and sell debt securities to maintain their target short-, intermediate- or long-duration strategy.
“Traditional bond ETFs usually sell bonds well before their final maturity dates and reinvest those proceeds into other bonds. But defined maturity ETFs invest in a variety of bonds that all mature within a defined window of time. At the end of that window, proceeds are returned to investors, who can either spend them or reinvest them into longer-dated funds as rates increase,” according to Invesco.
Recent additions to the BulletShares suite include the BulletShares 2028 Corporate Bond ETF (NYSEArca: BSCS) and BulletShares 2026 High Yield Corporate Bond ETF (NYSEArca: BSJQ).
For more on bond funds and strategies, please visit our fixed income channel.