“You can’t take advantage of an opportunity unless you know it exists.”   -Mark Bova.

Some say the trend is up for yields on the Treasury. Others say yields will remain historically low for quite some time. While it always depends on the investor and that investor’s needs for their money, in the current environment, we think there’s an investment you should know about and take advantage of, if it fits your investor profile.

Have you heard about defined maturity ETFs? There’s a good chance you haven’t. Although defined maturity ETFs have seemingly flown under the radar, 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 11/14/16 article on ETFs for ETF basics: https://lenityfinancial.com/2016/11/etfs-vs-mutual-funds-a-different-cone-for-the-same-ice-cream/

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

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. Keeping 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. 

Sources/Disclaimers:

Joel M. Dickson, Ph.D., John H. Escario, CFA, Samantha S. Choa, Vanguard Research 2014.

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.