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Monday, June 7, 2010

New Bond ETF product

Investors searching for yield (and there are a lot of you) here-to-fore have had the following choices:
-buy individual bonds
-buy bond ETFs matched to market indices
-buy CDs etc.

Individual bonds are unwieldy, illiquid, and generally difficult to diversify with. They have the advantage, in the minds of investors at least, that they can be held to maturity, in which case the investor gets his principle back, as long as they don't default.

ETFs matched to an index have no fixed maturity date and the price goes up and down so that at the end of 5 years, say, the ETF may have a price lower that what you paid for it.

Now we have target-maturity-date ETFs issued by Claymore Securities (actually a similar product has been previously launched by iShares in the muni sector). These track an index of investment grade corporate bonds that mature in a given year. For example, the 2014 fund (BSCE) is comprised of bonds that mature in 2014. Using a sampling technique, they track an index of these bonds. The expense ratio is .24%.

Using target-maturity-date ETFs, an investor can set up a laddered portfolio to capture corporate bond yields and be ensured, as long as there are no defaults, of receiving principle at maturity. For bonds that mature during the year, the proceeds are invested in Treasury bills until the end of the year.

I will continue to prefer the market indexed based ETFs such as AGG, LQD, and JNK; but understand that the target-maturity-date ETFs will appeal to certain investors, especially retirees.

For additional information, read index universe:


  1. Hey Robert,

    I used to ladder Canadian bonds (provincial and federal) for my parents. I could buy them with a minimum of $5000, sell whenever I wanted to or hold them to maturity, and I didn't have to pay an expense ratio. They're obviously different in the U.S. If you can explain how it works down there, I'd be curious.


  2. Andrew,
    Actually we have something similar in the U.S. at Treasury Direct. There investors can buy U.S. Treasury bills, notes, and bonds at no commission. Investors typically buy in the auctions and interest can be automatically wired to your account. So, like your Canadian bond ladder, a similar portfolio of Treasury issues can easily be setup in the U.S.
    The problem with Treasury issues is low yields. The uniqueness in the product described in the post is it makes a ladder with corporate bonds (and higher yields) more easily done.