July 6, 2011

Specific Maturity Date Bond Funds

Earlier this year a new style of bond funds was introduced by some of the investment companies.   I read about these in a recent CNN Money article.  The funds are specific maturity date bond funds.   Each such fund holds only bonds that mature in a specific date.   For example a 2012 funds would consist entirely of funds that mature in 2012.  This kind of fund is compelling to me for a few reasons.  

First of all it beats buying individual bonds because with such a fund you will be diversified across multiple bonds rather than having all your eggs in one basket.   You could of course buy a bunch of individual bonds and diversify your holds that way, but this kind of fund does all that for you. 

The second big benefit of a specific maturity date funds is that it will retain the principal of the bonds.   THe way normal bond funds are setup the funds trade bonds in and out in a regular cycle.   One downside with that is that if you want to cash in the fund at a given time then the trading value of the fund as a whole may be negative due to market conditions.   With the specific maturity date fund on the other hand the funds don't trade the bonds in and out, they hold the set of bonds until the maturity date and then liquidate them all at maturity.   In the given year of maturity the funds will be returned to the investors in the form of cash.  However the specific maturity date funds aren't immune from fluctuations in value either.   If you buy a 2017 fund then it could go up or down from now till 2017.   If you do hold the fund till 2017 and then they liquidate you should get your principal value back however.  

There are at least a couple investment houses offering this kind of bond fund so far.

Guggenheim has a set of BulletShare corporate bond ETFs for 2011 to 2017 (BSCB through BSCH).   They also have a set of High Yield Corporate Bond ETFs for 2012 (BSJC) to 2015 (BSJF).    Summary of the Guggenheim BulletShares ETFs.

iShares has AMT-free Municipal series ETFs for 2012 (MUAA) to 2017 (MUAF).

One way to invest in these funds would be to ladder a sum across multiple years.   Say you had $10,000 to invest, instead of putting it all into one fund you could put $2,000 into each year from 2012 to 2016.

I like the idea of maturity specific bond funds.   They offer the safety of diversification and should retain the principal values.   However they are relatively new and not very tested yet.  Hopefully they will work out well.

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