ETF Bond Investing and Avoiding Rate Risk: Target Maturity Bond ETFs

So here’s your predicament: you think the markets are overvalued and you still want yield, but yields are still at near all-time lows and long term bonds suffer from extreme rate risk (where rising yields will eat away at bond prices).   And you can’t invest in Canadian Real Estate because it is in one of the largest bubbles in history.  And, finally, you do not want to pick and choose bonds yourself i.e. you want a bond fund.

If you just invest in a short-term, medium-term, or long-term bond ETF, (for example:  BMO Short Bond ETF Ticker: ZCS) you are still exposed to uncertainty regarding rate risk.  The problem is that these funds are perpetually recycling your capital into new short term bonds.  Unlike purchasing a bond directly, they do not have a specific maturity.  So, how do you invest in bonds within an ETF that DO have a specific maturity.

Enter: Target Maturity Bond ETFs

These are “diversified” bond funds that contain many bond offerings that all mature at or around a specific date.  Once all of the bonds within the fund mature, the principal is returned to investors and the ETF is dissolved.  So, it functions like a portfolio of managed bonds with a small management fee.   Most of them make monthly distributions, so they are an interesting investment for those who prefer to invest in ETF bond funds, but fear the risk of rising rates. As far as we know, only RBC offers these in Canada, but in the US, Guggenheim and a few others offer similar products.

A couple of things to keep in mind.  These ETFs will likely be trading at a premium to their eventual final distribution of the principal.  You’re looking at Par Value per Unit to determine what this is and yield to maturity will tell you what the actual annual yield will be until the ETF is dissolved.

Here’s an example of a short term Target Maturity Bond ETF in Canada. The RBC Target 2020 Corp Bond ETF  (TSX: RQH).  They also have offerings for 2019, 2021, 2022, etc… depending on your timeframe for investment.  I specifically mentioned 2020 because, full disclosure, I am invested in it at the moment.  I’m planning on making a very large purchase at the end of 2020 and I’ve earmarked the cash for it by investing in this fund.   So, if you look at this particular ETF, you will see that the current yield is 2.89%, but the yield to maturity is 2.39% (this is really the actual yield you will receive all-told).  This is because the market price of the ETF is $20.00 and the par value per unit is $19.63, meaning $0.37 of the $20 will not be returned in the final distribution.

If you look at the holdings of this ETF, you will notice they are mostly bank stocks and other financials, but that’s life in bond investing and chasing yield in 2018.  Banks are the ones who need all the capital so they can make bad loans that are insured by the federal government.  But we’re getting off topic.

If you’re looking to invest in these funds, keep in mind they are generally individually fairly small and with low volume, so be mindful of that if you’re thinking of placing a market order.

Here is the complete list of RBC’s Target Maturity ETFs

RQE – RBC Target 2017 Corporate Bond Index ETF
RQF – RBC Target 2018 Corporate Bond Index ETF
RQG – RBC Target 2019 Corporate Bond Index ETF
RQH – RBC Target 2020 Corporate Bond Index ETF
RQI  – RBC Target 2021 Corporate Bond Index ETF
RQJ – RBC Target 2022 Corporate Bond Index ETF
RQK – RBC Target 2023 Corporate Bond Index ETF

Here is a complete list of Target Maturity Bond ETFS traded in the USA (denominated in USD)

SymbolETF NameAsset ClassTotal Assets ($MM)
IBCEiShares iBonds Mar 2023 Corporate ex-Financials ETFBond45.24
IBDDiShares iBonds Mar 2023 Corporate ETFBond84.35
IBCDiShares iBonds Mar 2020 Corporate ex-Financials ETFBond93.8
IBDCiShares iBonds Mar 2020 Corporate ETFBond102.4
IBCCiShares iBonds Mar 2018 Corporate ex-Financials ETFBond61.62
IBDBiShares iBonds Mar 2018 Corporate ETFBond92.16
IBDSiShares iBonds Dec 2027 Term Corporate ETFBond105.66
IBDRiShares iBonds Dec 2026 Term Corporate ETFBond98.29
IBDQiShares iBonds Dec 2025 Corporate ETFBond299.8
IBDPiShares iBonds Dec 2024 Corporate ETFBond219.84
IBDOiShares iBonds Dec 2023 Corporate ETFBond341.33
IBDNiShares iBonds Dec 2022 Corporate ETFBond396.02
IBDMiShares iBonds Dec 2021 Corporate ETFBond624.19
IBDLiShares iBonds Dec 2020 Corporate ETFBond552.9
IBDKiShares iBonds Dec 2019 Term Corporate ETFBond507.25
IBDHiShares iBonds Dec 2018 Term Corporate ETFBond345.24
BSCRGuggenheim BulletShares 2027 Corporate Bond ETFBond20.32
BSCQGuggenheim BulletShares 2026 Corporate Bond ETFBond54.27
BSCPGuggenheim BulletShares 2025 Corporate Bond ETFBond102.35
BSCOGuggenheim BulletShares 2024 Corporate Bond ETFBond268.64
BSCNGuggenheim BulletShares 2023 Corporate Bond ETFBond336.86
BSCMGuggenheim BulletShares 2022 Corporate Bond ETFBond711.05
BSCLGuggenheim Bulletshares 2021 Corporate Bond ETFBond874.66
BSCKGuggenheim BulletShares 2020 Corporate Bond ETFBond1102.73
BSCJGuggenheim BulletShares 2019 Corporate Bond ETFBond1064.15

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