Two months after Vanguard launched its BondBuilder suite of target-maturity bond ETFs, the lineup of 10 funds has amassed about $242 million in combined assets, a solid start in a corner of the bond ETF market where holders have a significant advantage.
The flows reflect a growing appetite for funds that behave more like individual bonds than traditional bond ETFs, particularly among financial advisors who build bond ladders for their clients.
The broader segment is growing steadily. Among issuers, target maturity bond ETFs now span about 120 products with about $70 billion in assets.
How they work
Each ETF holds a diversified basket of bonds that mature in a specific calendar year. As that year approaches, the duration of the portfolio decreases, and when the bonds mature, the ETF liquidates and distributes the proceeds to investors. Along the way, the fund pays monthly income.
Investors like these funds because they act much like individual bonds. There is a defined end point to which capital returns, with the benefit of diversification, liquidity and accessibility that comes with the ETF structure.
Traditional bond ETFs like Vanguard Total Bond Market ETF (BND) or the iShares Core US Aggregate Bond ETF (AGG) maintain a portfolio of bonds in constant renewal with no defined maturity date. If you want your money, you sell shares at whatever price the market is offering that day, which depends on the prevailing interest rates and credit conditions at that time.
With target maturity ETFs, you know when your capital returns. And because the duration reduces as the expiration date approaches, the position becomes less sensitive to rate movements over time. An increase in interest rates during the last year of the fund’s life would hurt much less than a traditional bond fund.
The competitive landscape
iShares’ iBonds suite remains the dominant player in this space, with roughly $41 billion in assets spread across about 60 funds covering Treasuries, TIPS, investment grade corporates, high yield and municipal bonds.
Invesco’s BulletShares line adds another $28 billion across nearly 30 ETFs, and State Street’s MyIncome series brings in about $800 million across nearly 20 funds.
Vanguard entered the space with its signature low rates. BondBuilder ETFs have an expense ratio of 0.08%, slightly below the 0.10% charged by iShares iBonds investment-grade corporate bond ETFs with similar maturities.
For now, Vanguard’s portfolio is limited to investment-grade companies, while iShares, Invesco and State Street offer broader coverage in other bond categories.
All in all, target maturity bond ETFs remain a small part of the overall fixed income ETF space, but the steady growth in assets suggests they are filling a real need.