Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Maturity Date Bond ETF's?
Old 05-26-2012, 03:34 PM   #1
Thinks s/he gets paid by the post
grumpy's Avatar
 
Join Date: Jul 2004
Posts: 1,321
Maturity Date Bond ETF's?

I recently came across this article on Maturity Date Bond ETF's:

A Guide to Maturity-Date Bond ETFs - Seeking Alpha

I have never been a fan of bond mutual funds but this alternative sounds pretty attractive for the fixed income portion of my portfolio.

Does anyone have any experience with these? What do I need to look out for? Any feedback appreciated.
__________________

__________________
...you can check out any time you like, but you can never leave...
grumpy is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 05-26-2012, 05:44 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,485
No, but I did seriously consider the Guggenheim funds recently when I converted my ex-employer 401k to my IRA. I would also be interested in others experience.

I ended up instead going with (at least for now) Vanguard Investment Grade Admiral (74% of fixed income), Vanguard GNMA (10%) and Vanguard High Yield Admiral (16%). At the time, this mix had a 3.75% yield and 4.8 duration, which were a lot better than Total Bond which had been my prior "go-to" fixed income fund.

If it appears that interest rates are about to rise I may dump those and go with the Guggenheim Bullet funds. I realize that the fair value will decline as rates rise but at least I know I would get my par back.
__________________

__________________
pb4uski is offline   Reply With Quote
Old 05-26-2012, 05:57 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,627
Are these much different from closed-end funds from the likes of Nuveen?
__________________
LOL! is offline   Reply With Quote
Old 05-26-2012, 06:29 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,485
I'm not familiar with the Nuveen funds but I think the Guggenheim funds are unique in that the bonds in the underlying portfolio will mature in the stated year and the proceeds from maturities will be distributed to investors in the fund. So the cash flow is the same as owning a portfolio of individual bonds that mature in the target year but you have more diversification that you might be able to achieve as an individual but pay 24bps management fees as a result.
__________________
pb4uski is offline   Reply With Quote
Old 05-26-2012, 09:09 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,627
CEFs have a set number of shares and no new shares will be created. So the sponsor in this case would buy all the bonds ahead of time to create the amount of CEF shares needed and there would be no new shares created nor shares redeemed for the bonds. The expense ratio would come out of the dividends.

ETFs do not have a set number of shares, but have a way to create new shares if someone with enough capital comes along and buys all the underlying stocks and exchanges them for a share of the ETF. I can imagine for a bond fund maturing in a specific year that one could not really buy all those bonds 5 or 10 years in the future in order to create a share of the ETF, so this is a problem for me to understand how these things would work.
__________________
LOL! is offline   Reply With Quote
Old 05-26-2012, 09:12 PM   #6
Recycles dryer sheets
 
Join Date: Dec 2011
Posts: 388
Quote:
Originally Posted by pb4uski View Post
I'm not familiar with the Nuveen funds but I think the Guggenheim funds are unique in that the bonds in the underlying portfolio will mature in the stated year and the proceeds from maturities will be distributed to investors in the fund. So the cash flow is the same as owning a portfolio of individual bonds that mature in the target year but you have more diversification that you might be able to achieve as an individual but pay 24bps management fees as a result.
These target date bond funds would seem to be an advantage if you have a timeline on a liability. Matching the duration of the ETF to your liability you would be indifferent to interest rate changes with the added benefit of diversification. However, for financing retirement and most other life goals, we don't have due dates. So, I don't really see the use of them. Maybe if you planned to buy an annuity at some later age you would want to put the premium amount into such a fund in the meantime.
__________________
Khufu is offline   Reply With Quote
Old 05-26-2012, 10:40 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,485
I think the difference is that if interest rates increase say 300 bps and your bond mutual fund value declines 15% that you will eventually get that 15% loss in value back but it will take a very long time - as old bonds mature new bonds will be bought that yield the higher rate.

With this product I think you could recover quicker, as if you owned individual bonds that were maturing in a given year becaus you have more control over the cash flow structure of your fixed income portfolio than you would by owning good quality bond funds.
__________________
pb4uski is offline   Reply With Quote
Old 05-27-2012, 03:34 AM   #8
Recycles dryer sheets
 
Join Date: Dec 2011
Posts: 388
Quote:
Originally Posted by pb4uski View Post
I think the difference is that if interest rates increase say 300 bps and your bond mutual fund value declines 15% that you will eventually get that 15% loss in value back but it will take a very long time - as old bonds mature new bonds will be bought that yield the higher rate.

With this product I think you could recover quicker, as if you owned individual bonds that were maturing in a given year becaus you have more control over the cash flow structure of your fixed income portfolio than you would by owning good quality bond funds.
How quickly you recover depends on the weighted average duration of the bond portfolio whether it's in a bond fund or held in your own accounts. The advantage of having all the bonds mature at once, is that you know you will be made whole at the maturity date. But while in your scenario the bonds' maturing at par erases their market value losses, the opposite scenario is also possible. Rates could previously have dropped increasing the market value of the bonds, a gain that will be wiped out when they mature at par. Either way, having your principal returned on maturity date you now face the reinvestment rate risk on the whole chunk of your bond portfolio: the currently available rates may be unfavorable. (This is a risk for a bond portfolio that has a declining duration, but not for the more typical bond funds that have a rolling duration.)
You would not face such a reinvestment rate risk if the maturity date had been chosen to coincide with an expected liability, like paying for a child's college expenses.

On second thought, now I understand the purpose. If you wanted to construct a bond ladder getting corporate or muni rates but didn't want to concentrate the credit risk by buying individual bonds, you could create the ladder by using a series of these target date ETFs. There would be no need for such ETFs for Treasuries since they all have the same credit risk and that's why there are none.
__________________
Khufu is offline   Reply With Quote
Old 05-27-2012, 06:38 AM   #9
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,492
Looking at the Guggenheim website, these ETFs are pretty thinly traded. If the volumes were high enough they might be an option for someone wanting to build a bond ladder.

I think a bond fund manager can do a better job than I can of figuring out what bonds and what maturities to hold to maximize returns.
__________________
MichaelB is offline   Reply With Quote
Old 05-28-2012, 08:09 AM   #10
Thinks s/he gets paid by the post
grumpy's Avatar
 
Join Date: Jul 2004
Posts: 1,321
I am thinking about using these ETF's to build a bond ladder. I have a good bit of cash sitting in a Discover savings account earning 0.9% interest. These are not funds I anticipate needing in the foreseeable future.

My understanding is that these ETF's are currently trading at a discount to NAV so that is attractive. My concern is that I don't know what I don't know about this type of investment.
__________________
...you can check out any time you like, but you can never leave...
grumpy is offline   Reply With Quote
Old 01-26-2013, 05:05 AM   #11
Recycles dryer sheets
 
Join Date: Jul 2012
Posts: 50
Does anyone have any new experiences with these products? As with the earlier posts, I'm considering them for creating a bond ladder with less risk than individual bonds.

Thanks.
__________________
jarts98 is offline   Reply With Quote
Old 01-26-2013, 07:31 PM   #12
Full time employment: Posting here.
 
Join Date: Oct 2012
Location: Reno
Posts: 556
Quote:
Originally Posted by grumpy View Post
I am thinking about using these ETF's to build a bond ladder. I have a good bit of cash sitting in a Discover savings account earning 0.9% interest. These are not funds I anticipate needing in the foreseeable future.

My understanding is that these ETF's are currently trading at a discount to NAV so that is attractive. My concern is that I don't know what I don't know about this type of investment.
Since they are limited term that return cash at the end of the term, their primary use is to provide a pool of bonds for a bond ladder for investors who otherwise don't have enough capital to properly spread risk among different bonds.
__________________
RobLJ is offline   Reply With Quote
Old 01-27-2013, 02:11 PM   #13
Confused about dryer sheets
 
Join Date: Aug 2012
Posts: 8
These ETFs look like a very interesting way to save for shorter-term goals with a set timeframe. I'm going to look into putting part of my house-downpayment fund in these securities.

If they had longer-dated versions it would also be an excellent way to save for tuition, if only 529 plans had a brokerage window. That would address one of my main complaints with 529 plans: you're supposed to start switching to bonds as your childrens' matriculation date approaches, but you're being exposed to considerable interest rate risk in the event that rates rise just before your kid starts school. These target-date maturity funds eliminate that.
__________________

__________________
fossil_fuel is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 03:20 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.