This article was originally published on ETFTrends.com.
Fixed-income investors are scrambling to adapt to a changing interest rate environment, but one may still generate yields and diminish rate risk through target-date bond ETFs.
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 2027 Corporate Bond ETF (NYSEArca: BSCR) and a group of high-yield options for years up to the Guggenheim BulletShares 2025 High Yield Corporate Bond ETF (NYSEArca: BSJP).
"The objective of the BulletShares ETFs is to deliver the effective maturity of bonds that are maturing in any year. So once you get to the end of the year, we send the net asset value back to share holders," William Belden, Managing Director and Head of ETF Business Development for Guggenheim Investments, said at the Inside ETFs 2018 conference.
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 typical bond funds would buy and sell debt securities to maintain their target short-, intermediate- or long-duration strategy.
Related: Guggenheim Expands Its Defined-Maturity BulletShares ETF Suite
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.
Using target-date bond ETFs to create a bond ladder strategy
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.
"The predominant use of BulletShares over time has been building bond ladder," Belden said. "So build a three-, five-, seven- or 10-year ladder, using BulletShares with each successive product, and as one matures, take the proceeds and move it to the bottom of the ladder - the latest day of maturity."
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.
More from ETF Trends Bitcoin Tumble Looks Sort of Familiar Exploring the Tech-Heavy Nasdaq-100 Index Lack of Conviction Seen for Gold Prices Ominous Technical Signs Mounting for Bitcoin Rebalancing Life Insurance: The New Strategy to Keep Clients Prepared