You can also create a “ladder” out of five or more individual bonds. A ladder is a series of bonds with different maturity dates. This option allows you to manage interest rate risk and ensure predictable cash flows. It also helps mitigate the risk of principal loss associated with bond funds. But this approach also results in a lower degree of portfolio diversification.
Bridging the Gap
You can address all of these needs by investing in target maturity bond exchange-traded funds, or ETFs. These funds behave like regular ETFs. But all of the bonds mature in the same year. As each bond matures, the funds move the proceeds into cash or cash equivalents rather than reinvesting them. At the funds’ maturity dates, they cease operations. Their value at the time is returned to shareholders. In this way, you can earn income, own a liquid investment, and have a known date at which their principal will be returned. This is a plus for those who are investing with a specific goal in mind.
What Are the Risks?
Target maturity funds aren’t without risks. They don’t seek to return a predetermined amount of cash to investors at the maturity date. That means the principal that gets returned may be less than the original investment if one or more of the bonds in the portfolios default. This risk can be mitigated by investing in target maturity funds that invest only in the highest-rated bonds. Also, these funds will fluctuate, just as any fund would. So buying and selling throughout the life of the fund carries the risk of loss. The further away from the maturity date, the more volatile the fund. As a result, if you need an absolute guarantee that all your principal will be returned, you should look elsewhere. But you should accept that short-term bond funds, targeted or otherwise, may hold investments with lower scheduled interest rates.
Case Study
A closer look at how these funds work can be found via iBonds’ case study of its 2012 S&P AMT-Free Municipal Bond Series ETF (MUAA), which has now matured. The yields on target-date maturity funds will fluctuate. But in general, the longer maturity funds will carry higher yields. Check the websites of the issuing companies to find out the funds’ current yields. The expense ratios for the funds are 0.30% for iShare’s iBond series, 0.10% for Invesco’s BulletShares Corporate Bond series, and 0.42% for the BulletShares High Yield Corporate Bond series.
How To Invest
ETFs can be purchased by setting up a brokerage account. The list of target maturity bond ETFs is as follows: Municipal Bonds
iShares iBonds Dec 2021 Term Muni Bond ETF (IMBJ) iShares iBonds Dec 2022 Term Muni Bond ETF (IBMK) iShares iBonds Dec 2023 Term Muni Bond ETF (IBML) iShares iBonds Dec 2024 Term Muni Bond ETF (IBMM)
Corporate Bonds
Invesco BulletShares 2021 Corporate Bond ETF (BSCL) Invesco BulletShares 2022 Corporate Bond ETF (BSCM) Invesco BulletShares 2023 Corporate Bond ETF (BSCN) Invesco BulletShares 2024 Corporate Bond ETF (BSCO) Invesco BulletShares 2025 Corporate Bond ETF (BSCP) Invesco BulletShares 2026 Corporate Bond ETF (BSCQ) Invesco BulletShares 2027 Corporate Bond ETF (BSCR) Invesco BulletShares 2028 Corporate Bond ETF (BSCS) Invesco BulletShares 2029 Corporate Bond ETF (BSCT) Invesco BulletShares 2030 Corporate Bond ETF (BSCU) iShares 2023 Investment Grade Corporate ex-Financials Term ETF (IBCE) iShares iBonds Mar 2023 Term Corporate ETF (IBDD) iShares iBonds Dec 2021 Term Corporate ETF (IBDM) iShares iBonds Dec 2022 Term Corporate ETF (IBDN) iShares iBonds Dec 2023 Term Corporate ETF (IBDO) iShares iBonds Dec 2024 Term Corporate ETF (IBDP)
High Yield Bonds
Invesco BulletShares 2021 High Yield Corporate Bond ETF (BSJL) Invesco BulletShares 2022 High Yield Corporate Bond ETF (BSJM) Invesco BulletShares 2023 High Yield Corporate Bond ETF (BSJN) Invesco BulletShares 2024 High Yield Corporate Bond ETF (BSJO) Invesco BulletShares 2025 High Yield Corporate Bond ETF (BSJP) Invesco BulletShares 2026 High Yield Corporate Bond ETF (BSJQ) Invesco BulletShares 2027 High Yield Corporate Bond ETF (BSJR) Invesco BulletShares 2028 High Yield Corporate Bond ETF (BSJS)
