Michael Johnston: Guggenheim, a pioneer in the area of target date fixed income products, has responded to strong interest in its BulletShares product lineup with the launch of three more products targeting investment grade corporate debtmaturing in a specific year. The recent addition, which took effect last week, extends the existing product lineup by three years, potentially appealing to investors looking to plan for liabilities six to eight years down the road. The new ETFs are:
- BulletShares 2018 Corporate Bond ETF (NYSEARCA:BSCI)
- BulletShares 2019 Corporate Bond ETF (NYSEARCA:BSCJ)
- BulletShares 2020 Corporate Bond ETF (NYSEARCA:BSCK)
Each of the new ETFs will hold a portfolio of corporate bonds that is scheduled to reach maturity in the indicated year. As that date approaches, the portfolio will transition to cash as the bonds mature. Instead of reinvesting the proceeds, the BulletShares ETFs will make a distribution to shareholders and then essentially shut down.
The BulletShares product family is somewhat unique from the rest of the bond ETF universe, delivering a “cash flow experience” that more closely matches those delivered by actual bonds. Most bond ETFs operate indefinitely, maintaining a relatively stable duration by holding a portfolio of securities that meets certain criteria. As such, most bond ETFs don’t actually hold securities to maturity, and there is no scheduled return of the initial investment to investors. The BulletShares ETFs are designed to function in much the same way as an individual bond would. Investors receive interest payments over the life of the note, as well as a return of capital upon maturity. Implementing this approach through the exchange-traded structure brings a number of potential benefits, including immediate diversification across dozens of different issuers [see Are Bond ETFs Broken?].
The BulletShares ETFs can be useful in a number of different ways. First, they can be used to fine tune the effective duration of a fixed income portfolio, since these products are considerably more granular than most bond ETFs. Perhaps the most appealing use, however, is for investors looking to plan against known future liabilities with the goal of reducing interest rate risk (i.e., duration) as those obligations near. Whereas most bond ETFs keep duration relatively stable, the interest rate risk component of BulletShares should decline over time as the relevant maturity date approaches.
That makes these products useful for investors expecting a cash outflow at some point in the future–whether it be a family planning for college tuition or a multi-billion dollar pension fund anticipating an outflow several years down the road. “Advisors are using BulletShares to provide the benefits of liquidity and transparency, and we are committed to growing this suite,” said William Belden, head of product development for Guggenheim Investments. “We’ve found that there is a strong interest in additional maturity dates to use in portfolio construction so we’re pleased to expand the line-up to meet their needs.”
The launch of the three new ETFs makes a total of nine such products focusing on investment grade corporate debt; Guggenheim had previously offered products focusing on bonds maturing between 2012 (NYSEARCA:BSCC) and 2017 (NYSEARCA:BSCH). Guggenheim also offers a suite of high yield BulletShares ETFs, ranging from 2012 (NYSEARCA:BSJC) to 2015 (NYSEARCA:BSJF).
iShares also offers a lineup of target maturity date municipal bond ETFs, ranging from 2012 (NYSEARCA:MUAA) to 2017 (NYSEARCA:MUAF).
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