Target Maturity Bond Funds: Alternative to Laddering

How to invest in target maturity bond funds
•••

Bartomeu Amengual / Getty Images

One of the decisions fixed-income investors have always faced is the choice between investing in individual bonds or bond funds.

Bond funds provide extensive diversification in a single investment, but they also don’t have a maturity date, which means that investors have no guarantee that all of their principal will be there at a specific point in the future, as is the case with individual bonds.

Investors can also create a “ladder”—or a series of bonds with different maturity dates—out of five or more individual bonds. This option enables the investor to manage interest rate risk and ensure predictable cash flows, and it helps mitigates the risk of principal loss associated with bond funds. However, this approach also results in a lower degree of portfolio diversification.

Bridging the Gap

Now, investors can address all of these needs by investing in target maturity bond exchange-traded funds, or ETFs. These funds behave like regular ETFs, except all of the bonds mature in the same year.

As each bond matures, the funds move the proceeds into cash or cash equivalents rather than reinvesting them. At the funds’ maturity dates, they cease operations and their value at the time is returned to shareholders.

In this way, investors can earn income, own a liquid (easily traded) investment, and have a known date at which their principal will be returned (a plus for those who are investing with a specific goal in mind, such as college payments).

Bond ETFs can help investors build bond ladders and still maintain a high level of diversification.

Risks

Target maturity funds aren’t without their risks. They don’t seek to return a predetermined amount of cash to investors at the maturity date, so the principal that gets returned may be less than the original investment if one or more of the bonds in the portfolios default. (This risk can be mitigated by investing in target maturity funds investing only in the highest rated bonds.)

Also, these funds will fluctuate—just as any fund would—so buying and selling throughout the life of the fund carries the risk of loss. The further away from the maturity date, the more volatile the fund.

As a result, investors who need an absolute guarantee that all of their principal will be returned should look elsewhere, accepting at the same time that short-term bond funds, targeted or otherwise, may hold investments with lower scheduled interest rates. 

Target Maturity Bond Fund Case Study

A closer look at how these funds work can be found via iBonds' case study of its 2012 S&P AMT-Free Municipal Bond Series ETF (MUAA), which has now matured. See the study here.

The yields on target-date maturity funds will fluctuate, but generally speaking, the longer maturity funds will carry higher yields. Check the websites of the issuing companies to find out the funds’ current yields.

The expense ratios for the funds are 0.30% for iShare's iBond series, 0.10% for Invesco's BulletShares Corporate Bond series, and 0.42% for the BulletShares High Yield Corporate Bond series.

How to Invest

ETFs can be purchased by setting up a brokerage account. The list of target maturity bond ETFs is as follows:

Municipal Bonds

  • iShares iBonds Dec 2021 Term Muni Bond ETF (IMBJ)
  • iShares iBonds Dec 2022 Term Muni Bond ETF (IBMK)
  •  iShares iBonds Dec 2023 Term Muni Bond ETF (IBML)
  •  iShares iBonds Dec 2024 Term Muni Bond ETF (IBMM)

Corporate Bonds

  • Invesco BulletShares 2021 Corporate Bond ETF (BSCL)
  • Invesco BulletShares 2022 Corporate Bond ETF (BSCM)
  • Invesco BulletShares 2023 Corporate Bond ETF (BSCN)
  • Invesco BulletShares 2024 Corporate Bond ETF (BSCO)
  • Invesco BulletShares 2025 Corporate Bond ETF (BSCP)
  • Invesco BulletShares 2026 Corporate Bond ETF (BSCQ
  • Invesco BulletShares 2027 Corporate Bond ETF (BSCR)
  • Invesco BulletShares 2028 Corporate Bond ETF (BSCS)
  • Invesco BulletShares 2029 Corporate Bond ETF (BSCT)
  • Invesco BulletShares 2030 Corporate Bond ETF (BSCU)
  • iShares 2023 Investment Grade Corporate ex-Financials Term ETF (IBCE)
  • iShares iBonds Mar 2023 Term Corporate ETF (IBDD)
  • iShares iBonds Dec 2021 Term Corporate ETF (IBDM)
  • iShares iBonds Dec 2022 Term Corporate ETF (IBDN)
  • iShares iBonds Dec 2023 Term Corporate ETF (IBDO)
  • iShares iBonds Dec 2024 Term Corporate ETF (IBDP)

High Yield Bonds

  • Invesco BulletShares 2021 High Yield Corporate Bond ETF (BSJL)
  • Invesco BulletShares 2022 High Yield Corporate Bond ETF (BSJM)
  • Invesco BulletShares 2023 High Yield Corporate Bond ETF (BSJN)
  • Invesco BulletShares 2024 High Yield Corporate Bond ETF (BSJO)
  • Invesco BulletShares 2025 High Yield Corporate Bond ETF (BSJP)
  • Invesco BulletShares 2026 High Yield Corporate Bond ETF (BSJQ)
  • Invesco BulletShares 2027 High Yield Corporate Bond ETF (BSJR)
  • Invesco BulletShares 2028 High Yield Corporate Bond ETF (BSJS)

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.