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One predicament current fixed-income investors are dealing with in today's very low interest rate environment is rolling over maturing bonds or the need to increase one's bond exposure. We all know 10-year Treasuries are yielding 1.9% and 30-year Treasuries 2.9%, with short maturities offering even worse returns. With the potential for interest rate risk to rise later this year and next, many investors are seeking to stay short in their maturities and are turning to corporate bonds to generate a bit more income.

Rather than picking individual issuers with specific maturities, many investors rely on corporate bond funds with names that seem to fit their needs, such as XYZ Short-Term Corporate Bond Fund. However, unlike individual bonds, bond funds do not have a specific maturity date when an investor's principal falls due for repayment. The proceeds of maturing bonds held in the fund are reinvested back into the portfolio. Because of this feature, most bond funds trade based on competitive yields to its distributions and the NAV will fluctuate in value, generally moving higher as rates decrease and lower as rates increase.

In times of low rates, preservation of capital becomes a bit trickier if income yield is also the goal. However, some investors are willing to move down the quality ladder to gain the higher yields. The use of a high-yield bond fund spreads the credit-risk over a much wider variety of issuers, but still lack a specific maturity date.

There are investment vehicles called Unit Investment Trusts (UIT) that act like a bond fund in their holding of a portfolio of assets, but have a specific date for maturing / distribution / liquidation. A UIT will usually match its portfolio maturities to the termination date. Prepayments of bonds assets to the UIT could create a return of capital distribution to investors. This ROC distribution reduces ongoing income and final return of capital from the UIT. UITs offer the diversity of a bond fund with a date-specific return of capital. But they are difficult to find and liquidity may be an issue.

Last year, Guggenheim Investments began offering its BulletShares ETFs. The basic concept is to offer short-term corporate bond portfolios with date specific maturities ranging from 2012 to 2021, in two investment grades - Corporate and High-Yield Corporate. Income is paid monthly and the ETF is liquidated / terminated on Dec 31 of the date-specific year. In the final year, accumulating principal repayments will be reinvested in lower yielding commercial paper until distribution and the lower yield will most likely reduce final income distributions.

Currently offered are the following combinations of date-specific maturities and credit quality:

Guggenheim BulletShares 2012 High Yield Corp Bond BSJC

Guggenheim BulletShares 2013 High Yield Corp Bond BSJD

Guggenheim BulletShares 2014 High Yield Corp Bond BSJE

Guggenheim BulletShares 2015 High Yield Corp Bond BSJF

Guggenheim BulletShares 2012 Corp Bond BSCC

Guggenheim BulletShares 2013 Corp Bond BSCD

Guggenheim BulletShares 2014 Corp Bond BSCE

Guggenheim BulletShares 2015 Corp Bond BSCF

Guggenheim BulletShares 2016 Corp Bond BSCG

Guggenheim BulletShares 2017 Corp Bond BSCH

For investors seeking a place to park income-designated capital for the short-term until overall interest rates become more favorable, the defined-maturity of the BulletShares ETFs would seem to fit their needs. With the lowest yield on the curve, short-term fixed-income investments have been historically a difficult place to find adequate returns.

Reviewing a few of the portfolios in specific BulletShares ETFs should give investors a better understanding of the assets in this family of ETFs. Below is listed information on the 2014 Corporate, 2014 High Yield, 2015 High Yield, and 2017 Corporate ETFs:

BulletShares 2014 Corporate (BSCE) $21.03, 2.0% yield

$106 million AUM,235 securities, 2.4 average years to maturity, weighted average coupon 4.70%, weighted average bond price $106.39, NAV $20.88, 52% of portfolio A-, A or A+ S&P Credit Rating and weighted average accretive rating A2. Expense ratios 0.24%.

Top holdings:

CELLCO PART/VERIZON WIRELESS W/I 5.55% 2/1/2014 1.66 %
CITIGROUP INC 5.0% 09/15/2014 1.61 %
BARCLAYS BK PLC 5.2 07/10/2014 1.29 %
CITIGROUP INC 6.375 08/12/2014 1.25 %
GOLDMAN SACHS GP 6 05/01/2014 1.24 %
JPMORGAN CHASE 4.65 06/01/2014 1.24 %
MORGAN STANLEY MS 4.75% 04/01/2014 1.08 %
JPMORGAN CHASE 5.125 09/15/2014 1.08 %
DOW CHEMICAL CO 7.6 05/15/2014 1.07 %
BANK OF AMER CRP 7.375 05/15/2014 1.05 %

Sector Exposure:

Financial 45.89 %
Consumer, Non-cyclical 15.38 %
Communications 14.10 %
Energy 6.13 %
Technology 5.17 %
Industrial 3.97 %
Consumer, Cyclical 3.24 %
Basic Materials 2.95 %
Utilities 2.51 %
Diversified 0.67 %

Bullet Shares 2014 High Yield Corporate (BSJE) $25.50, 5.0% yield

$61 million AUM, 128 securities, 3.6 weighted average years to maturity, weighted average coupon 8.50%, weighted average bond price $102.68, NAV $25.40, 76% of portfolio B+ to BB+ S&P Credit Rating and weighted average accretive rating B1. Expense ratios 0.42%.

Top holdings:

CIT GROUP INC 5.25% 04/01/2014 2.86 %
FORD MOTOR CREDIT CO LLC 8.700% 10/01/2014 DD 09/23/09 2.77 %
HCA INC 8.500000 04/15/2019 2.71 %
TENET HEALTHCARE CORP 8.8750% 7/01/2019 2.67 %
NXP BV / NXP FUNDING LLC 9.750% 08/01/2018 DD 07/20/10 2.62 %
CONSOL ENERGY INC 8.000% 04/01/2017 DD 10/01/10 2.62 %
FRONTIER COMMUNICATIONS 8.250000 05/01/2014 2.40 %
SMITHFIELD FOODS INC 10.000% 07/15/2014 DD 07/02/09 2.28 %
NEXTEL COMMUNICATIONS 5.950000 03/15/2014 2.25 %
FORD MOTOR CREDIT CO LLC 8.000000 06/01/2014 2.13 %

Sector Exposure:

Consumer, Non-cyclical 24.13 %
Consumer, Cyclical 17.01 %
Communications 16.98 %
Financial 14.42 %
Energy 10.74 %
Industrial 7.54 %
Technology 3.65 %
Basic Materials 2.68 %
Utilities 2.04 %
ETF 0.80 %

BulletShares 2015 High Yield Corporate (BSJF) $25.40, 5.3% yield

$73 million AUM, 128 securities, 3.7 weighted average years to maturity, weighted average coupon 8.60%, weighted average bond price $98.14, NAV $25.31, 68% of portfolio B to BB+ S&P Credit Rating and weighted average accretive rating B1. Expense ratios 0.42%.

Top holdings:

NEXTEL COMMUNICATIONS 7.375000 08/01/2015 3.52 %
ALLY FINANCIAL INC 8.3 2/12/2015 3.27 %
CHS/COMMUNITY HEALTH SYS 8.875000 07/15/2015 2.86 %
NOVELIS INC/GA 8.750% 12/15/2020 DD 12/17/10 2.74 %
FORD MOTOR CREDIT CO LLC 7.000% 04/15/2015 DD 04/09/10 2.69 %
CONSOL ENERGY INC 8.250000 04/01/2020 2.46 %
ARAMARK CORP 8.500% 02/01/2015 DD 08/01/07 2.43 %
FORD MOTOR CREDIT CO LLC 5.625000 09/15/2015 2.37 %
CHESAPEAKE ENERGY CORP 9.5000% 2/15/2015 2.28 %
CIT GROUP INC 7.000000% 05/04/2015 2.25 %

Sector Exposure:

Financial 23.50 %
Communications 14.34 %
Consumer, Non-cyclical 13.96 %
Energy 12.38 %
Consumer, Cyclical 12.17 %
Basic Materials 7.46 %
Industrial 7.08 %
Technology 3.71 %
Utilities 3.47 %
ETF 1.47 %
Diversified 0.45 %

BulletShares 2017 Corporate (BSCH) $21.65, 3.4% yield

$150 million AUM,135 securities, 5.5 average years to maturity, weighted average coupon 5.8%, weighted average bond price $110.25, NAV $21.42, 50% of portfolio A-, A or A+ S&P Credit Rating and weighted average accretive rating A2. Expense ratios 0.24%.

Top holdings:

GEN ELECTRIC CO 5.25 12/06/2017 2.92 %
CITIGROUP INC 6.125 11/21/2017 2.87 %
WELLS FARGO CO 5.625 12/11/2017 2.49 %
DEUTSCHE BK 6% 09/01/17 2.47 %
MORGAN STANLEY 5.95 12/28/2017 2.10 %
IBM CORP 5.7 09/14/17 1.71 %
GEN ELEC CAP CRP 5.625 09/15/2017 1.67 %
GOLDMAN SACHS GP 6.25 09/01/2017 1.66 %
TIME WARNER CABL 5.85 5/1/2017 1.64 %
BEAR STEARNS CO 6.4 10/02/2017 1.58 %

Sector Exposure:

Financial 50.60 %
Consumer, Non-cyclical 13.97 %
Energy 8.23 %
Communications 7.57 %
Consumer, Cyclical 5.85 %
Industrial 5.79 %
Technology 4.09 %
Basic Materials 2.37 %
Utilities 1.53 %

A few interesting facts materialize from this review. The first is that the Corporate portfolio holdings have more exposure to the financial sector than the High Yield portfolio. The High Yield portfolio is also more diversified by industrial sector. Based on your prognosis for the financial sector over the next few years, a heavy overweighting in financials may or may not be an attractive mix.

The second observation is the premium of the NAV and the average bond price (as of 9/30). As these assets mature at par, the yield to maturity becomes less as the NAV is reduced at distribution. For example, the NAV for the 2017 Corporate ETF is $21.42, but includes an average bond price of $110. The NAV based on par value could be as low as $19.30. If this were the case, the yield to maturity would be closer to 1.6%. The 2015 High Yield average bond price is below par at $98 and the yield to maturity would be closer to its cash yield.

It seems the High Yield NAV is closer to par than its Corporate brethren and may be a better selection, based on the investor's risk tolerance to B rated debt.

Literature can be found here (pdf):

More information on specific ETFs is found here (scroll over "Fixed Income" on left side for other ETF info)

Information on the underlying index is found here

Unlike holding a specific, individual bond where there is a contractual obligation to redeem at par, these ETFs have no pre-arrangement with investors as to the NAV at termination. It is possible that the termination price will be lower than par value, and as such, investors could experience a loss of capital.

Overall, these ETFs may be considered as an alternative to individual bond selections for short-term investment horizons, especially for smaller bond portfolios willing to take on the credit-risk of a lower quality portfolio.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation. This commentary does not constitute individual investment advice and is not a personalized recommendation to buy, sell or hold securities. Past performance is no guarantee of future returns.

Source: Are Date-Specific Corporate Bond ETFs Used As A Short-Maturity Alternative Right For You?