Q: I am interested in your opinion of the rather new target date bond funds offered by Guggenheim (Bullet shares) and I shares. It seems to me that they might be a good vehicle for fixed income that would dampen the effects of rising interest rates if held to maturity. One could ladder them and reinvest the funds as they come due.
I try to keep 50-55% of my portfolio in fixed income.
Schwab is saying that they are “not recommended” meaning that they are not on the recommended list of funds. After a rather lengthy conversation with a fixed income specialist, I remain confused as to whether these funds can deliver the expected returns. The specialist did finally concede that these funds would be” less volatile” in a rising interest rate environment. He cautioned that these funds hold longer maturity bonds than the target date that would be sold at a loss if interest rates rise, lowering the expected return. BUT, Schwab’s own research site shows that the bond portfolios as over 99% within the duration of the target maturity date.
What is your opinion of these funds?
A: What a great question? We have researched these investment vehicles and come to some of the same conclusions you did. I think they will mitigate some of the interest rate risk vs. owning a bond fund that manages to a constant average duration. My concerns are that these target maturity ETF’s don’t just own bonds that mature on a specific date or within the targeted window. A portion of the bonds that they buy are longer dated bonds that have call dates within that targeted time frame. To be fair, in this low rate environment these bonds are currently priced like they would be called on those dates. However, if we enter into a rising rate environment and corporations decide to not call these specific issues, then the bullet share ETFs would be forced to sell them in the open market at a price that could result in a loss. This makes it very hard to predetermine the exact amount of principal that will be returned to you. Another good option may be for you to buy an individual bond ladder. If you ever want to talk in more detail about this particular issue just let us know. We offer a free one hour consultation.