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Target-Maturity Bond ETFs to Hedge Against Rising Rates


Investors are moving away from bond assets as duration risk mounts with interest rates rising and ongoing Fed “tapering” concerns. However, “target-maturity” bond exchange traded funds are holding strong in the fixed-income space.

Since the middle of May, target-maturity bond funds saw $174 million in net inflows, reports Murray Coleman for the Wall Street Journal. Meanwhile, bond ETFs experienced $6.7 billion in outflows, according to XTF data. [Limit Interest Rate Exposure with Defined-Maturity Bond ETFs]

“With interest rates at historic lows, people are concerned about buying traditional bond funds that can lose their principal. They’re looking for alternatives,” Michael McClary, chief investment officer at ValMark Advisers, said in the article.

Larger bond ETFs typically hold a basket of bond securities with varying maturities and re-allocates to once a bond matures. Target-maturity ETFs, on the other hand, only hold bonds that mature in a set year and distributes cash back to investors upon maturity.

Additionally, with target-maturity bond ETFs, advisors can implement a type of bond ladder strategy that has evenly spaced out maturity dates to help minimize interest rate risk.

“These ETFs hit the sweet spot of a market fixated on every Fed move and the threat of higher rates,” Andy Martin, president at 7Twelve Advisors, said in the article.

Currently, investors can select from a range of maturity-date bond ETFs from iShares , Guggenheim Investments and db X-trackers that cover investment-grade corporates, junk and municipal bonds. Additionally, Guggenheim is considering expanding its line to include international fixed-income options. [iShares and Guggenheim Prep ETFs for Rising Rates]

“These are going to keep becoming increasingly popular as an alternative to creating bond ladders, particularly for investors with smaller portfolios,” Mark Donnelly, a portfolio manager at AEPG Wealth Strategies, said. “We’re finding that target-maturity funds appeal to buy and hold investors who want steady income streams without the threat of losing their original principals.”

For more information on target-maturity bonds, visit our target-date ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.