Investors with fixed income often find themselves in a dilemma because they have to make a choice between individual bonds and bond funds while making investments.
If they choose individual bonds, diversification can be enhanced in the investment. Yet without a maturity date, investors cannot make sure that all the principals can be kept at a particular point in later years.
If investors choose bond funds with various maturity dates, they can withstand interest risk, minimize principal loss, and predict cash flows. The drawback, however, is the poor portfolio diversification.
An alternative to solve the dilemma is to buy the Target Maturity bond fund. Target Maturity bond funds, also called Defined-Maturity bond funds, hold a group of bonds with similar or the same maturity dates. Sometimes the fund is also called a Target Maturity bond exchange-traded fund, or an ETF.
The fund intends to obtain a particular return target over a given holding period outperforming the total returns of the fund’s custom benchmark. When the maturity date is approaching, all the money in the fund will be paid out, and the fund will close.
The advantages of Target Maturity bond funds
Compared with traditional bond funds, investors can have less interest rate risk while enjoying more diversified portfolios.
Besides, the fund is flexible because you can target the maturity you want or purchase multiple funds with staggered maturities, just like a bond ladder.
The fund also has better liquidity than individual bonds. Each fund can have daily liquidity, and investors can move in and out of the funds according to their needs.
As compared to money markets and most certificates of deposits, Target Maturity can produce better yields.
There are various kinds of Target Maturity bond ETFs, such as the municipal bond like iShares 2019 S&P AMT-Free Municipal Bond Series ETF (MUAH), the corporate bond Guggenheim BulletShares 2020 Corporate Bond ETF (BSCK), and the high yield bond Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK). You may pick a suitable type and purchase the fund through a brokerage account.