When first introduced in 2010, defined-maturity bond exchange-traded funds seemed like a good way to replicate individual bonds and build bond ladders.
The funds hold bonds that mature in the same year, returning capital at a predetermined time. And since they trade like stocks, advisors can do block trades and allocate to client accounts, greatly simplifying ladder management.
But advisors have not fully jumped into defined-maturity products—until lately.
The somewhat novel mechanics of the products, combined with the impending threat of higher interest rates since they were introduced, have limited advisors’ adoption.
“I’m surprised they haven’t grown more than what we’ve seen, given their utility [for use in a] basic bond ladder,” said Ben Johnson, director of global ETF and passive strategies research at Morningstar. “Any advisor who’s gone out to try to [build ladders] with bonds a la carte knows how painful and costly that can be.”
Advisors are usually slow to jump into something new, said Michael McClary, chief investment officer at ValMark Advisers in Akron, Ohio, which runs about $6 billion in ETF strategies.
And while waiting for higher rates after the financial crisis, “everyone piled into ultra-short duration” funds,” said Jason Bloom, director of global macro ETF strategy at Invesco, which manages the BulletShares lineup of defined-maturity ETFs.
Advisors also held off until they saw the first products successfully mature in 2011, Bloom added.
“We like control, so that’s why [defined-maturity portfolios] are attractive to us,” McClary said. “We don’t like the fact that with an open-end maturity date, you lose a bit of control.”
Darren Munn, founder of Camelot Portfolios in Maumee, Ohio, echoes that sentiment. “We can move in and out of investment-grade and high-yield” products, he said. Munn also looks for opportunities to roll over positions prior to maturity depending on changes in the yield curve.