Success of Target Maturity Bond ETFs

While bond funds provide investors with comprehensive diversification, manager expertise, and regular income – they don’t have a fixed maturity date, as the fund must buy and sell individual bonds to maintain an average maturity promised to investors. In a rising rate environment, it means the fund can suffer a loss if it must sell bonds when prices are down. Conversely, while falling rates can lift bond prices, they can be harmful if the fund must replace older bonds with new ones that pay less, reducing the fund’s yield.

To address this dilemma, target maturity bond funds have become a popular solution, as they provide the benefits of a traditional bond fund while having a fixed maturity date. As the name suggests, target-maturity bond funds purchase bonds that have a common maturity date. When the fund’s maturity date arrives, the fund closes and investors receive their principal just as they do with individual bonds. The income derived from the bond fund is relatively stable because the fund doesn’t need to replace holdings along the way.

Value proposition of Target Maturity Bond ETFs

Time Horizon Matching:

A key advantage of target maturity bond funds is the ability to precisely match the time horizon of the investment with the maturity date of the underlying bonds, thus allowing investors to align their fixed-income investments with specific financial goals or liabilities. This precise time horizon matching enhances the predictability of cash flows and provides a clear path for meeting future financial needs.

Reduced Interest Rate Risk:

Interest rate risk is an ever-present consideration when it comes to fixed income investing.  With target maturity bond funds having bonds that share a common maturity, the portfolio’s overall sensitivity to changes in the interest rate environment declines over time. This targeted approach to managing interest rate risk enhances the predictability of returns and provides investors with a level of certainty that may be particularly valuable in uncertain market environments.

Liquidity:

Target maturity bond funds combine the benefits of traditional bond investing with the liquidity and flexibility inherent in the ETF structure. Unlike individual bonds that may be less liquid in the secondary market, the ETF structure allows investors to easily trade and adjust their bond exposure in response to changing market conditions or evolving investment objectives.

Diversification:

Though target maturity bond funds may focus on specific maturity years, the fund will hold a basket of bonds from different issuers and sectors, reducing concentration risk. This diversified approach enhances risk management, as the impact of a default or credit event on a single bond is mitigated by the broader portfolio. Therefore investors benefit from a well-balanced mix of issuers and sectors, contributing to a more resilient fixed-income portfolio.

The success of Target Maturity Bond ETFs

In a year where yield-conscious investors have gravitated toward fixed income ETFs, RBC’s target-maturity bond ETF suite has benefitted immensely from the prevailing higher-for-longer interest rate environment. As of November 2023, the current RBC Target Maturity Bond ETF (Corporate) suite AUM has collectively passed $2 billion, with their government target maturity bond ETF suite also steadily growing.

It should be noted that RBC first launched their target maturity bond suite in September 2011 with eight ETFs that have already matured. The current lineup of RBC ETFs, listed below, provides increased optionality for investors with a solution to manage duration more precisely.

RBC Target Maturity Corporate Bond ETFs:

• RBC Target 2024 Corporate Bond Index ETF | Ticker: RQL
• RBC Target 2025 Corporate Bond Index ETF | Ticker: RQN
• RBC Target 2026 Corporate Bond Index ETF | Ticker: RQO
• RBC Target 2027 Corporate Bond Index ETF | Ticker: RQP
• RBC Target 2028 Corporate Bond Index ETF | Ticker: RQQ
• RBC Target 2029 Corporate Bond Index ETF | Ticker: RQR

RBC Target Maturity Government Bond ETFs:

• RBC Target 2024 Government Bond Index ETF | Ticker: RGQL
• RBC Target 2025 Government Bond Index ETF | Ticker: RGQN
• RBC Target 2026 Government Bond Index ETF | Ticker: RGQO
• RBC Target 2027 Government Bond Index ETF | Ticker: RGQP
• RBC Target 2028 Government Bond Index ETF | Ticker: RGQQ
• RBC Target 2029 Government Bond Index ETF | Ticker: RGQR

While the current elevated interest rate environment has led many individuals to ‘lock in’ with GICs, which can’t be cashed in before maturity, target maturity bond ETFs are viable investment alternative that provides a greater investment flexibility.  

It should be noted that investors can lose money if they sell one of these funds before maturity. That could happen if rising rates drive down bond prices. However, for investors looking to securely invest their money in a solution that has a fixed maturity – while maintaining flexibility – target maturity bond funds are worth considering.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.