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Are These Bond ETFs the 'Next Generation' in Fixed Income Investing?

Eric Dutram
  • (0:45) - BulletShares Lineup
  • (3:05) - Use The BulletShares Approach In Your Own Personal Portfolio
  • (6:10) - What Happens When a Fund Closes Down?
  • (9:35) - How Much Does Sector Breakdown Change From Year to Year?
  • (11:45) - What's Next For BulletShares
  • (14:05) - Why The Name BulletShares?
  • (15:10) - Episode Roundup: Podcast@Zacks.com

Though bond ETFs usually play second fiddle to their equity counterparts, they have become extremely popular in their own right too. It is easy to see why this is the case, as the fixed income world is notoriously difficult for the average investor to access in a cheap and efficient manner, while diversification is next to impossible without large amounts of capital.

Bond ETFs solve these problems with ease, allowing investors to access dozens or hundreds of different fixed income securities in a single ticker. We have seen funds like AGG, BND, and LQD amass over $30 billion each as investors have flocked to ETFs in order to obtain their fixed income exposure.

But the main criticism of these products is that they don’t really give you the full ‘bond experience’. By that I mean, a ‘normal’ bond investment eventually matures and pays out the principal, while most bond ETFs on the market today do not. Instead, they usually focus on a given year to maturity range—such as with a product like CSJ—or they simply remove securities before they reach maturity.

This is obviously different than if you had just bought a bunch of bonds in a portfolio, and it could put you through more interest rate risk than simply holding to maturity and cashing out then would have.

A Different Way?

Fortunately, one company—Guggenheim—recognized this problem and developed a suite of bond ETFs called ‘BulletShares’ to address the issue. These funds all have a defined maturity date and allow investors to pick a given year and hold a number of bonds that mature in that time. Then, once everything has matured, the product pays out back to investors and the ETF is dissolved, just like you would experience in a ‘regular’ bond.

To get some insights on this product type, I spoke with Bill Belden, the Managing Director and Head of ETF Business Development at Guggenheim, for a look at how these products work for the latest edition of the Dutram Report.

BulletShares in Focus

In the podcast, we talk about how this idea for defined year bond funds came into being, and the kind of hurdles and issues that come into play when you only focus on a single calendar year for bonds. I also ask if each year might offer up investors a different type of exposure—since BulletShares stretch out into the mid 2020s—and what (if any) differences there are between the years.

We also discuss what happens to funds that mature this year, namely their high yield corporate fund BSJH or the 2017 Corporate Bond ETF BSCH, and what investors need to know about this process. In addition, we also take a closer look at how this approach might offer up a different experience in a rising rate environment, and how these bonds are impacted by shifting interest levels.

We also discuss some of the top uses for this style of investing in the bond world, be it with products that are close to maturity—such as their billion-dollar asset under management products BSJI and BSCI—but also how investors may be able to use the longer-dated products to match their assets with upcoming liabilities or big planned purchases in the years ahead.

Finally, we also talk about what is next for this concept in terms of other products in the future, and I also try to get out of Bill why the name ‘BulletShares’ was chosen in the first place.

Bottom Line

Bill and I dive deep into the world of ‘BulletShares’ and discuss what makes these products tick. If you have ever been curious about these products, or wanted to learn more about bond investing, definitely give this podcast a listen.

But what do you think about BulletShares and my interview with Bill? Make sure to write us in at podcast @ zacks.com or find me on Twitter @EricDutram to give us your thoughts on this topic, or anything else in the ETF market.

But for more news and discussion regarding the world of ETFs, make sure to be on the lookout for the next edition of the Dutram Report (each and every Thursday!) and check out the many other great Zacks podcasts as well!

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ISHARS-CR US AG (AGG): ETF Research Reports
VANGD-TOT BOND (BND): ETF Research Reports
GUGG-BS2017 HYC (BSJH): ETF Research Reports
GUGG-BS2018 HYC (BSJI): ETF Research Reports
GUGG-BS2017 CB (BSCH): ETF Research Reports
GUGG-BS2018 CB (BSCI): ETF Research Reports
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