White Paper: An In-Depth Look at Defined Maturity ETFs
From: Guggenheim Investments
As the ETF market has evolved, so too has the depth and breadth of available products.
Defined maturity exchange traded funds (ETFs), a recent structural innovation in the rapidly growing ETF market, have created a wide range of new opportunities for fixed income investors. Today, these ETFs provide sectorspecific exposure to fixed income markets, including segments of the market previously only accessible to institutional investors.
Investors seeking diversified bond exposure were once limited to purchasing shares of bond mutual funds or purchasing several different individual bonds. While both of these options offer certain benefits, they can also present challenges for investors, including limited trading flexibility and transparency of holdings as well as potentially higher costs.
Fixed income ETFs offer a welcome alternative because, like mutual funds, the ETFs may also offer diversified exposure to a basket of bonds in a single transaction, but unlike mutual funds, ETFs trade on major stock exchanges, affording the added benefits of intra-day pricing and trading flexibility. They also offer greater transparency of holdings, potential tax efficiencies, and generally lower expenses than both mutual funds and individual bonds.
For these reasons, fixed income ETFs have become the investment vehicle of choice for many investors. While fixed-income ETFs have been heralded as a convenient, low-cost alternative to both bond mutual funds and individual bonds, certain investment strategies such as building a laddered bond portfolio or obtaining targeted exposure to particular points on the yield curve were still only attainable through a direct investment in bonds. That is, until the introduction of defined maturity ETFs—a recent structural innovation that has opened the door to new opportunities for bond investors.