Laddering with defined-maturity bond funds?


R

Rich Carreiro

Just curious if any of the pros (or laypeople) have
any opinions on the pros and cons of building a
bond ladder out of defined-maturity bond funds
(be they ETFs or traditional mutual funds)?

At least on the surface it sure seems attractive.
But what are the gotchas? (There always has to
be gotchas :).
 
Ad

Advertisements

D

David S Meyers CFP

Just curious if any of the pros (or laypeople) have
any opinions on the pros and cons of building a
bond ladder out of defined-maturity bond funds
(be they ETFs or traditional mutual funds)?

At least on the surface it sure seems attractive.
But what are the gotchas? (There always has to
be gotchas :).
Some Advantages to the target maturity bond funds:
liquidity, diversification, institutional-spreads (when management
buys the securities to build the portfolio)

Some Disadvantages:
ongoing expense ratios, possibly ill-timed cap-gains distributions if
others are selling off and you aren't.

Odd quirk which isn't obvious when comparing holding a single bond to
maturity versus holding a target-maturity bond fund to that same
maturity: unpredictable cash-flows. While the target-maturity bond
fund may have a specific maturity date, the individual securities in it
may be changing over time as management buys or sells more securities
to keep the thing going, and they may be buying bonds at premiums
(which gives higher coupon payments but a "loss" at maturity) or at
discounts (which gives lower coupon payments but a a "bump" at the
end). When you buy a single individual bond and hold it to maturity,
assuming no defaults, you know right at that time what the payment
stream will look like all the way out.

This last point may have an impact for folks living off a portfolio and
needing predictable cash streams along the way.

It also means that two target maturity funds with different portfolios
but identical maturity dates may in fact have different durations.



--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top