Investors who are implementing a laddered fixed-income portfolio with varying maturities to better manage interest rate risk may take a look at two new Guggenheim Investments target-maturity bond exchange traded funds.
“Our investment-grade and high-yield BulletShares offer investors a creative way to tap into the fixed-income market by focusing on securities with a given maturity date,” William Belden, Managing Director, Head of ETF Business Development at Guggenheim Investments, said in the press release. “The defined-maturity feature continues to be an effective investment strategy for investors looking to save for life events like retirement and college costs amid a volatile economic environment.”
Unlike traditional bond ETFs, these defined-maturity bond funds typically buy bonds that mature in the year the ETF will terminate, ensuring that investors can collect the bonds’ face value at maturity, along with a steady income stream along the way. As such, investors are meant to buy-and-hold these securities until maturity.
In contrast, a regular bond ETF runs the risk of losing its original principal if interest rates go up, depending on the bond ETF’s effective duration, since the bond funds would buy and sell debt securities to maintain their target strategy.
Using target-date bond funds, an investor could create a bond ladder strategy to create a portfolio with varying maturity dates. The bonds’ maturity dates are evenly spaced across several years so that the proceeds from maturing bonds may be reinvested at regular intervals, so those investors who held Guggenheim BulletShares 2015 Corporate Bond ETF (BSCF) or Guggenheim BulletShares 2015 High Yield Corporate Bond ETF (BSJF) , which both will close at the end of December this year, upon maturity can turn around and reinvest the money back into Guggenheim’s suite of BulletShares ETFs that mature up through 2025 for BSCP and 2023 for BSJN if they already hold position in the other target-date muni bond ETFs.
Additionally, using defined-maturity bond ETFs in a laddered portfolio may also offer advantages in a both falling and rising rate environments. [BulletShares ETFs for a Bond Ladder Strategy to Hedge Rate Risk]
“If interest rates increase, an investor can reinvest the proceeds, if any, from maturing bonds at higher interest rates,” Belden added. “If interest rates decrease, the investor potentially benefits from price appreciation as the portfolio’s higher-yielding bonds increase in value.”
As the two new ETFs’ names suggest, BSCP holds onto investment-grade corporate debt securities that mature by December 2025 while BSJN tracks speculative-grade corporate debt securities that mature by December 2023.
BSCP’s credit quality includes AAA 3.2%, AA 11%, A 34% and BBB 52.0%. Sector weights include banking 24.6%, consumer non-cyclical 19.6%, energy 14.3%, tech 11.5%, telecom 9.3%, REITs 4.2%, capital goods 3.8%, consumer cyclical 3.3%, basic industry 2.3% and insurance 2.1%.
BSJN’s credit quality breakdown includes BB 55.6%, B 38.4% and CCC 5.8%. Sector exposure includes telecom 21.2%, consumer non-cyclical 16.9%, energy 15.6%, consumer cyclical 14.5%, tech 10.6%, capital goods 7.8%, basic industry 4.0%, electric 3.4%, banking 1.4% and transportation 1.3%.
BSJN has a 0.42% expense ratio and BSCP has a 0.24% expense ratio.
For more information on new fund products, visit our new 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.