Defined-Maturity Funds: A Bond Alternative With Compromises
Defined-maturity funds are hybrid funds designed to bridge one of the biggest gaps between traditional bond funds and individual funds.
As the name implies, defined-maturity bonds cease their existence on a specified date. At maturity, investors receive a distribution equivalent to the fund’s net asset value. These funds are intended to be a solution for investors who desire certainty over the timing of cash flows or wish to stagger their interest rate exposure, but do not want to invest in individual bonds. Since these are funds, however, they come with compromises that should be understood and considered before purchase.
The complexities lie not only in the structure of the funds themselves, but also in the differences between bonds and bond funds. Understanding how these two differ helps to better understand the role defined-maturity funds can play in a portfolio.
In this article, I discuss the differences between individual bonds and defined-maturity funds. I then compare and contrast the offerings from the only three firms I was able to identify as currently offering defined-maturity funds: Fidelity, Guggenheim and iShares. I also include real-world examples of monthly and final distributions (sidebar boxes here and here).
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