Take Some Target Practice With Defined-Maturity BulletShares

bulletDefined maturity ETFs have developed a small but interesting niche within the bond fund universe. True to their name, these funds mature at the end of a specific year, which is typically indicated by the name of the fund. Today, I’d like to take a look at a menu of defined maturity bond ETFs from investment management firm Guggenheim, referred to as their BulletShares. Guggenheim charges a 24 basis point annual management fee for each of the Corporate Bond products and a 42 basis point fee for managing the High Yield Corporate Bond funds.

  To see a list of high yielding CDs go here.  

Below are tickers and names for all 16 of Guggenheim’s funds:

As opposed to most other pooled bond products which may continually adjust blended maturity and duration to compensate for changing interest rate and macroeconomic environments, defined maturity ETFs are managed to liquidate on December 31 (or thereabout) of the year of their titling. So this year both BSCE and BSJE (see above) are scheduled to liquidate.

If you look at some of the vitals for BSCE, it appears to exhibit characteristics of a bond that is indeed coming close to maturity, with low effective duration and weighted maturity as well as a weighted bond price of close to par.

FUND CHARACTERISTICS

Number of Securities

196

Average Effective Duration

0.5

Average Maturity

0.53 years

Weighted Average Coupon

4.57

Weighted Average Bond Price

100.89

On the yield side, this fund again projects numbers that one might expect from a extremely short-term corporate bond in this environment, with current and expected payout going forward basically mimicking a bank account.

Yields as of 2/14/2014

30-Day SEC Yield

0.34%

Distribution Rate

0.72%

Weighted Average Yield to Maturity

0.66%

Weighted Average Yield to Worst

0.65%

 

On a trading basis, the fund has actually been trading at a premium to net asset value, as can be seen below:

Recent trades have BSCE at $21.26, which equates to a premium of .3% to net asset value, which certainly should be factored against the anemic yield the fund is currently producing. If we subtract that .3% against the YTW stated by Guggenheim, we’re essentially buying an assumed .35% yield for the rest of the year. While in all likelihood the net asset value of the fund won’t fluctuate much prior to the end of the year, if the NAV were to happen to drop just a few cents, it is possible one could end up with a net total return loss upon liquidation.

I examined the recently liquidated 2013 BulletShares product, BSCD, and found that the NAV was static between two prices, $20.77 and $20.78, for the entire year. If history is any indicator, then perhaps the .35% yield is safe, but for this fund, like all other defined maturity funds, there is no accurate way to predict liquidation NAV, which is the major drawback to buying them in my opinion. If you buy an individual bond at a premium to par, you know exactly what your yield to maturity or worst will be, because it is generally stated to you by your broker when you buy the security.

If you are interested in defined maturity products, you should consider the above exercise your blueprint to analyzing whether any other of these funds are worthwhile for your portfolio or not. As I’ve often opined, I believe most bond investors should develop individual investment grade bond portfolios to eliminate the variability of ETF redemption value, thus I would avoid the first nine funds on Guggenheim’s menu. It’s possible some investors looking at high-yield may benefit from one of the BulletShares funds, especially if there’s an inclination as to exactly when one needs money to mature. Most others would probably do just as well to take a look at the perpetual ETF index vehicles HYG, JNK, or a CEF trading at a discount to net asset value for better yields.

Summary

Defined maturity bond ETFs, such as those from Guggenheim, have evolved as a solution for investors with a specific timetable for their monies. Unfortunately, the uncertainty of liquidation value compared to purchase price, and to a lesser extent management fees, serve to minimize the effectiveness of the vehicle. Though there may be some value here for junk bond investors looking for a pooled bond asset with an end-of-year maturity, I think by and large BulletShares fall short of the bond bullseye.

About the author:

aloisiAdam Aloisi has over two decades of experience investing in equities, bonds, and real estate. He has worked as an analyst/journalist with SageOnline Inc., Multex.com, and Reuters and has been a contributor to SeekingAlpha for better than two years. He resides in Pennsylvania with his wife and two children. In his free time you may find him discussing politics, playing golf, browsing antique shops, or traveling.

 

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