Investors Like Target-Date Bond ETFs
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Friday, September 14, 2012

Investors Like Target-Date Bond ETFs

Defined-maturity ETFs rapidly gain popularity with investors attracted to the security of bonds and fund diversification, reports the Wall Street Journal. A relatively new structure, defined-maturity ETFs offer the traditional perks of ETFs, with an added plus: "They mature, just like target-date mutual funds," Patrick McGee for the WSJ writes.

And two asset-management firms dominate the growing market: BlackRock [profiles: BlackRock and iShares] and Guggenheim [profile]. iShares is the sole provider in the municipal-bond space, and Guggenheim's BulletShares is leading the corporate-bond market.

A little intel on the applications of defined-maturity ETFs: They provides protection against potential increases in interest rates, McGee writes. He demonstrates how with defined-maturity ETFs, an investors can collect interest, receive the principal back at the defined fund termination date, then distribute all its assets back to fund holders. Meanwhile with traditional ETFs, rising interest rates can cause fixed-income assets to drop in price, causing the value of the fund to fall as well.

"If you buy a bond fund that has a three-year duration today, unfortunately in 2015 it will still have a three-year duration," Anthony Davidow, portfolio strategist at Guggenheim, told WSJ. "That's the difference between defined-maturity and perpetual maturity."

The article also quotes Matt Tucker, head of iShares fixed-income investment strategy.

Read the rest of the story on WSJ online.

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