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Meeting Income Needs in Today’s Environment

If you’re an investor with specific near-term needs for your money, fixed income has historically been an important component to your portfolio.

There are various strategies that can be used with fixed income. And it depends on your needs, risk tolerance and investor profile as to which strategy to use. But here is a little known ETF that can be considered in all of these scenarios.

Have you heard about defined maturity ETFs?

Vanguard research reports that, “Since their launching nearly 30 years ago, in 1985, defined maturity funds (mutual funds) have existed as a small sub-segment of the mutual fund industry.” So, while this may be a new genre for some, it’s been around in forms other than ETFs for a few decades.

Need more information about ETFs before you read on? Check-out our blog on ETF basics: ETFs vs. Mutual Funds: A different Cone for the Same Ice Cream

Defined maturity ETFs first arrived on the investment scene in 2010.

In 2010, iShares® launched the iShares® iBonds® AMT-Free Muni Bond ETFs. Next, Guggenheim Investments launched corporate defined maturity ETFs in June of 2010 known as the BulletShares® ETFs. And today there are municipal, corporate and high-yield defined maturity ETFs.

Some of the advantages of the defined maturity ETF are:

  • Liquidity – there is intraday liquidity
  • Transparency – unlike a mutual fund, an ETF reports it’s holdings on a daily basis.
  • Diversification – typically between 150 and 400 bonds in an underlying ETF portfolio.
  • Duration Profile – similar to owning an individual bond. The strategy of a defined maturity ETF is to own a basket of bonds that have maturity dates in the year in which the ETF matures. Unlike most other options, with the exception of owning the individual bonds outright, the bonds within a defined maturity ETF are held until they mature. (Not withstanding a default of an underlying bond.) Meaning that the duration, a portfolio’s sensitivity to changes in interest rates, of the defined maturity ETF get’s shorter and shorter until the ETF matures at which point, the duration is zero.

Essentially, a defined maturity ETF provides the investor with a simpler way to utilize several well-known bond strategies.

  • Ladder
  • Bullet
  • Barbell

So no matter your outlook on rates …up, down or flat, an approach of investing in a “short-term” ladder of defined maturity ETFs may be a strategy to review. Taking your near cash and investing in this way can allow for a significant increase in yield over basic money market rates and short-term CDs. And keep in mind that for your cash needs, those low yielding money markets and CDs could still be your best option. However, for your near cash, where you can take on some more risk, the potential for the return on your money and the return of your money being equally attractive may be worth your investment. 


Defined Maturity Bonds, Vanguard Research 2014: Joel M. Dickson, Ph.D., John H. Escario, CFA, Samantha S. Choa                            Lenity Financial, Inc.: Mark R. Bova, ETF Expert

Risks: Default of the underlying bonds, the value of the investment could go down, not FDIC insured, the ETF sponsor may have the ability to extend the maturity date. Read the prospectus of all investments before investing any money.

The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not taken to be, investment accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.