! Defined-Maturity Funds: A Bond Alternative With Compromises
Charles Rotblut, CFA is a vice president at AAII and editor of the AAII Journal. Follow him on Twitter at twitter.com/CharlesRAAII.


Patrick Gariety from MO posted over 4 years ago:

Thanks much for this article! I don't wish to purchase individual bonds, but I've been seriously considering defined maturity ETFs/funds as an alternative way of capturing some of the benefits of a bond ladder. Your article was very helpful in clarifying the available options and their differences.

Tim Soles from TX posted over 4 years ago:

Good article. I have the Guggenheim ETFs in my IRA portfolio (at Fidelity) and, for me, it is a way of extending risk into high yield bonds while minimizing the risk of default and thereby obtaining higher yields at the lower risk due to maximum diversification in this bond class.

Lew Marks from OR posted over 4 years ago:

I think these investment vehicles give you most of the best of both worlds:
1. Defined maturities
2. Good bond picks at good prices

Ever try to pick your own bonds and get a decent price. The big boys give you the left-overs at higher prices and commissions.

Time will tell, but, so far, I like these products.


Victor Bradford from CO posted over 4 years ago:

Thank you for the excellent article and the suggested investment resources.
I have also investigated defined-maturity investments and individual bonds, and perhaps the greatest benefit of the former is the diversification these investments allow (I have the benefit of humility, since I nearly invested in General Motors bonds back when they were rated in the B category).
Nevertheless, the article may have overstated some differences between bonds, bond funds, and defined-maturity investments. Brokerage houses often buy large lots of some bonds, so smaller investors may also receive some pricing benefits of large-lot purchases. You can indeed suffer tax consequences and capital losses from all bond vehicles depending on when you sell them, or when your estate sells them (if the bonds are sufficiently long term). A "perpetual" bond ladder actually resembles a bond fund in many ways. Finally, even when buying individual bonds from a broker, you often wind up relying on their advice (or that of the rating agencies), too, unless you are quite experienced or hubristic.

Mike Timlin from CO posted over 4 years ago:

I am late and new to fixed-income investing, but I still have time to get ready for retirement, so now is the time to learn.

When I heard about these late in 2012, I decided to 'run the experiment'. So, I bought equal quantities of each of the BSJD through BSJI in the first half of 2013.

So far, in spite of all of the Fed-induced turmoil, the experiment has been a great success. The BulletShares High-Yielders have been magnificent. The blended payout has been about 4.5%. The capital gains have been a nice surprise, as I'm a low-cost buyer. The volatility has been trivial.

Note that these funds are high-coupon (~8%) and short-duration (~4 years or less), which I like.

I plan to roll over the BSJD when it matures into BSJJ, and I may roll over the BSJE to BSJK, if I can get a good prices.

Everybody should own some of these products, in my opinion.

Judith Boulden from UT posted over 4 years ago:

Shortly after purchasing MUAE - iShares 2016 AMT-free Muni series, I noted unusual volatility in price in late May and early July, 2013. The usual price is about 53.50 and this activity went from a low of about 52.25 to a high of 54.55 and back again within a couple of days. Was it a "flash crash" technical issue, or, more importantly, are these EFT's so thinly traded that a large transaction can impact the price this much? Any information or comments would be appreciated.

Charles Rotblut from IL posted over 4 years ago:

Hi Judith,

The price movement you are discussing is about 4.5%, which over the course of few days can simply reflect market volatility. Interest rates spiked over the summer and impacted the prices of both bonds and bond funds.

The fixed-maturity funds are designed to be held until maturity. The day-to-day price movement doesn't matter much once you hold the fund because the proceeds from the underlying bonds will be paid to shareholders after the bonds mature.


Russell Pettijohn from MO posted over 4 years ago:

How much dividend and yield?

Judith Boulden from UT posted over 4 years ago:

Hi Charles,
I realize that, but would you look at the price chart? It looks odd to me to have that spike.

Scott Davis from ME posted over 4 years ago:

Thanks Charles - enjoyed your talk at the conference in Orlando

Philip Croll from North Carolina posted over 3 years ago:

I own several of the Guggenheim funds. I am concerned that while they pay regular interest, the principle may not be fully returned. Several of the junk bond version I own are showing losses on paper. Do you have any information on the record of how they do over the full term, both income and principle? Would these be expected to come back up over time? It won't do much good to earn income and then lose principal at the end.

Charles Rotblut from IL posted over 3 years ago:

Hi Philip,

The factors that influence whether or not you will receive the amount you paid for the funds (or more) depends on:
*The interest you receive over time you held the fund
*The date at which each bond held by the fund matures
*The share price you bought the fund at

The compromise with defined-maturity bond funds is that they are a hybrid product and as such, you are not assured the full return of the money you invested at the funds' maturity.


Charles Rotblut from IL posted about 1 year ago:

Since the original publication of this article, iShares has changed the name of its defined maturity bond funds and the tickers. The updated list is available on the iShares website.


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