Defined Maturity Bond ETFs Have Room To Grow

Includes: BSCC, BSCD, BSCE
by: Tom Lydon

Bond-focused exchange traded funds that have defined maturity, similar to an individual bond, are catching the interest of investors. The appeal of diversification mixed with the set maturity of a bond has benefits in the current market conditions.

"The ETFs were designed partly to be building blocks in a 'laddered' bond portfolio, where investors buy bonds with staggered maturity dates and hold them to maturity. Traditionally, laddering was done with individual bonds, but getting sufficient diversification can require an investment of $500,000 or more," Daisy Maxey wrote for The Wall Street Journal.

Guggenheim Investments has the most popular line up of defined maturity ETFs, with about $1.6 billion invested in them. Asset growth in this sub-set of bond ETFs has not been impressive, but it is slow and steady. Similarly, BlackRock's iShares line-up offers defined maturity municipal bond ETFs that have around $220 million in assets.

But while the interest payment and face value of an individual bond are spelled out up front, the funds' monthly distributions and payouts at maturity may fluctuate some. "It's a little different structure" for investors to learn about, said Timothy Strauts, a Morningstar ETF analyst.

Investment advisors are the biggest buyers of these types of funds, but many investors are waiting to see how these materialize at maturity. Guggenheim BulletShares 2011 Corporate Bond liquidated successfully at the end of last year -- the first in the series to mature -- and more advisors are now showing interest, William Belden of Guggenheim said in the report.

The drawback to these types of ETFs is that distributions could fluctuate after additional shares are created when interest rates rise or fall. Rising interest rates equal falling bond prices. Since the end result, or distribution, of these funds are unknown, investors have been slow to warm up. This has led to liquidity issues and in turn, larger bid/ask spreads.

For now, providers that have a foothold in this sector of the bond ETF market -- BlackRock and Guggenheim -- will continue to offer the products, and may even expand offerings.

Defined maturity ETFs from Guggenheim:

  • Guggenheim BulletShares 2012 Corporate Bond ETF (BSCC)
  • Guggenheim BulletShares 2013 Corporate Bond ETF (BSCD)
  • Guggenheim BulletShares 2014 Corporate Bond ETF(BSCE)

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: 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.