Target Maturity Bond Funds
These products provide a middle ground that combine the benefits of bonds and bond funds: They offer the security-level diversification typical of an ETF, but they also have a set maturity date at which investors can receive a return of principal. This helps offset the problem inherent in perpetual bond funds: the unknown amount of principal coming back to the investor when the fund is sold. Note, however, that this principal is not guaranteed as is the case with many target-date funds — if an underlying issue defaults, investors will suffer some loss of principal.
Target-maturity corporate and high-yield funds are offered by Guggenheim under the BulletShares family, and a series of five municipal bond products is issued by iShares. The Guggenheim and iShares websites offer more information on the strategies employed by these funds.
International Corporate Bond Funds
This is a prime example of an asset category where investors didn’t have a low-cost option for a pure play until ETFs came along. Now, there are no fewer than eight funds that invest in this space:
- International Corporate Bond Portfolio ETF (NYSE:PICB)
- SPDR Barclays Capital International Corporate Bond ETF (NYSE:IBND)
- iShares Global High Yield Corporate Bond Fund (BZX:GHYG)
- iShares Global ex USD High Yield Corporate Bond Fund (BZX:HYXU)
- Market Vectors International High Yield Bond Fund (NYSE:IHY)
- Market Vectors Emerging Markets High-Yield ETF (NYSE:HYEM)
- SPDR BofA Merrill Lynch Emerging Markets Corporate Bond ETF (NYSE:EMCD)
- iShares Emerging Markets Corporate Bond Fund (BZX:CEMB)
Are these ETFs volatile relative to the average bond fund? You bet. Any disruptions in the global markets will undoubtedly take a disproportionate toll on this group of funds, particularly those lower on the list. It’s also a small and unproven market segment — together, these eight funds have less than $300 million in assets. Comparatively, the Vanguard Total Bond Market ETF (NYSE:BND) has $113.3 billion.
Still, this relatively new category offers investors a way to pick up some extra yield and add some diversification to their portfolios.
Investors also have a way to play yield curve movements without having to establish their own long and short positions: iPath US Treasury Flattener ETN (NYSE:FLAT) and iPath US Treasury Steepener ETN (NYSE:STPP), together with the three-times leveraged versions of these portfolios.
The volume isn’t there yet, but these funds bear watching for investors who are interested in making more exotic plays on the bond market. If nothing else, they provide a quick visual reference regarding the movement of the U.S. Treasury curve.
The Bottom Line
None of these funds will make you rich, to be sure. However, they just might provide solutions for investors who are looking to diversify into bonds and still get a decent yield with some room for capital appreciation.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.