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Dancing With Defined Maturity ETFs

Dancing With Defined Maturity ETFs

Defined maturity exchange traded funds differ from their traditional counterparts. Defined maturity ETFs, also known as target-date funds, typically track an index of bonds that all mature in the same year.

Those funds also have the maturity year in their names. A hypothetical example would be ABC Defined Maturity ETF 2023, meaning that fund's bonds all mature in the year 2023.

What Happened

Bond segments available via target-date ETFs include investment-grade corporate bonds, high yield bonds and municipal bonds. Some the largest ETF issuers, including BlackRock Inc.'s (NYSE: BLK) iShares and Invesco Ltd. (NYSE: IVZ), are major players in the defined maturity market.

“The two firms also offer targeted high-yield and municipal bond products,” CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said in a note out Monday. “The 2021 vintage of these ETFs has been among the most popular, particularly as interest-rate sensitivity remains heightened.”

The iShares iBonds Dec 2021 Term Corporate ETF (NYSE: IBDM) and the Invesco BulletShares 2021 Corporate Bond ETF (NYSE: BSCL) are among the largest target-date ETFs.

Why It's Important

The $1.28 billion BSCL holds 411 investment-grade corporate bonds. BSCL has an effective duration of 2.20 years.

“Given the similar maturity profile, both ETFs have an average duration of 2 years and sport a 3.4% 30-day SEC yield,” said Rosenbluth. “Yet there are differences from a credit perspective. Using S&P Global Credit Ratings, BSCL has more exposure to A-rated bonds (42% vs. 39% for IBDM) and less exposure to BBB (43% vs. 45%).”

Nearly 53 percent of IBDM's 564 holdings are rated AA or AA. BSCL's lower credit quality has been assist to that fund's returns over the years.

“BSCL was the stronger performer as of January 23, with a 2.89% annualized total return (2.60% for IBDM),” said Rosenbluth.

What's Next

Both ETFs have annual fees of 0.10 percent, or $10 on a $10,000 investment. While defined maturity ETFs are usually buy-and-hold, instruments, data suggest BSCL and IBDM are fairly active in terms of daily turnover.

“We had expected that target maturity ETFs were more likely used to buy and hold to maturity, rather than as tactical trading vehicles,” said Rosenbluth. “Yet due in part to steady inflows BSCL and IBDM trade approximately 475,000 and 290,000 shares daily. Both have tight penny bid/ask spreads. Both are effectively buy-and-hold-until-maturity investments; IBDM’s annual turnover is 6% while BSCL’s is 7%.”

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