This helps them maintain stability in their portfolio by investing in a broadly diversified portfolio of bonds, and generates interest they can use to provide retirement income. It also gives them a way to deal with interest rate risk by owning bonds across a range of maturities.
Now there’s an easy and extremely cost-effective way to do this using ETFs (exchange traded funds) instead of dealing with the cost and aggravation of buying multiple individual bonds year after year. The ETF owns a broad portfolio of actual bonds, all maturing in the same target year, which they hold until maturity.
This type of investment is commonly called a defined maturity or target maturity bond ETF. A couple of different firms offer these funds. One of the popular brands is BulletShares, which just slashed management fees to a slim 0.1% following an ownership change from Guggenheim to Invesco. iShares also offers a similar suite of funds at equally competitive prices.
Let’s say, for example, you want to build a five-year bond portfolio. Instead of buying dozens or hundreds of individual bonds, which is time-consuming and costly, you can simply divide your money among five ETFs holding a broad portfolio of bonds maturing in 2019, 2020, 2021, 2022, and 2023. You can purchase these ETFs at no cost through many brokers. Voilà. You instantly own a portfolio of bonds!
In 2019, your first batch of bonds reaches maturity. You don’t need to do anything. The ETF automatically redeems the bonds for you at maturity and deposits the cash to your account. You can keep it, spend it, or reinvest it in a new portfolio of bonds maturing, say, in 2024. It’s so easy, everyone can be a bond expert!
Target maturity ETF portfolios are available in different bond varieties including corporate bonds (different companies), high yield (lower credit quality but higher income), and municipal bonds. The 2019 BulletShares portfolio, for example, owns 368 different corporate bonds, all maturing in 2019, according to Morningstar.
Not all ETF innovations are worthwhile, but target maturity funds rightfully appeal to a broad range of bond investors. They save time and money, offer broad diversification, and offer targeted exposure to different bond maturities.