Defined Maturity Bond Funds – Don’t Confuse These Great Products With Target Date Funds

Defined maturity funds, which are also known as target maturity bond funds, have been around for a few years, but have yet to become very popular.  Once interest rates start rising, we believe that many investors will start switching from traditional bond funds to defined maturity funds.

What’s the difference between Defined maturity funds and target date funds?

These funds have almost nothing in common. “The Date” in a target date fund is your expected retirement date.  A target date fund adjusts its asset allocation (including stocks and bonds) based on this date, becoming more conservative with time.  However, the fund is designed to keep going for decades following the target date.  A defined maturity fund will contain bonds that mature within a few months of the specified maturity date.  At the maturity date, the fund will make a cash payout to its investors.


How does a defined maturity fund differ from a normal bond fund?

The value of a “normal” bond fund will constantly fluctuate as interest rates change.  While the value of defined maturity date will also fluctuate, fluctuations based on changes in interest rates will become smaller and smaller as the fund approaches maturity.  This is because unlike a traditional bond fund, a defined maturity fund will pay back the full face value of all the bonds it holds (minus defaults) on the maturity date.  Put another way, as long as you buy and hold a defined maturity fund to maturity, you don’t need to worry about interest rate risk like you do with a normal bond fund.  You can learn more about this here.


Sounds like a holding an individual bond?

Yes, but you get an important benefit. When you buy a defined maturity fund, your investment will be diversified among dozens, if not hundreds, of bond issues.

Below is a list of the Defined Maturity ETF’s and Mutual Funds offered by the 3 main providers of these products: Fidelity, iShares and Guggenheim Bulletshares.   In the current low interest rate environment, if you are looking for a safe place to park your cash for 1 to 5 years, then CD’s are offering the best rate of return.  You can see current rates for competitive CD’s here.

If you are willing to take on a bit of extra risk however, the Guggenheim high yield defined maturity funds are offering a nice yield premium over CD’s currently.  We will update this list once a month as well as add any new providers which gather a significant amount of assets.

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Marc Prosser


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