It’s typically easier—and generally safer—to invest in a bond fund rather than individual bonds. But most bond funds have a major drawback—there’s no fixed maturity date, so no matter how long you stick with the fund, there is no guarantee that you won’t end up with a loss. With individual bonds, if you reach the maturity date, you’re guaranteed to get back your principal as well as the accumulated interest (barring a default).
One increasingly popular solution: Target maturity bond exchange-traded funds (ETFs), a hybrid between a bond fund and an individual bond.
There are about 40 of these ETFs. They are offered by major providers such as Invesco and BlackRock, and they have attracted more than $16 billion in assets. They come in corporate, high-yield, emerging-market and municipal-bond versions, currently ranging in maturities from 2019 to 2028.
How they work: An ETF manager creates a diversified portfolio of hundreds of bonds that mature in the same year. Once they all have matured, the fund closes and investors get back their principal (as well as any remaining interest payments) just as they would with individual bonds. Example: iShares iBonds December 2024 Term Corporate ETF holds about 350 high-quality bonds from issuers such as Apple and Bank of America and yields 3.85%. That’s better than the best five-year CD, which recently yielded 3.4%.
The ability to choose end dates makes the ETFs attractive as a way to save for college, for example. Or you could use them to build a bond ETF “ladder,” with one maturing every year—taking advantage of rising interest rates by rolling money into higher-yielding ETFs as older ones mature.