With higher short rates now, advisors may feel less need to sell ETFs that are approaching maturity. That’s because the increased rates on cash have helped yields on defined-maturity portfolios hold up as bonds mature and cash holdings grow. Cash is held in T-Bills or cash equivalents until all the bonds in a fund mature. But earning nothing on that growing cash hoard has been an issue.
From 2011 to 2016, advisors saw income “slowly dropping to zero” as the term ended, Bloom said.
The improved rate environment and more comfort with the products seem to be driving flows of late.
“Flows have really picked up just in the last three to four months,” Bloom said. BulletShares took in almost $1 billion in last year’s fourth quarter, a rate that is continuing into 2019, he said. The BulletShares stable now holds about $10 billion in assets.
BlackRock’s suite of iBond products have $6.6 billion in assets, said Jon Rather, fixed-income specialist at BlackRock. That’s up from $2.7 billion at the end of 2016. Inflows continue at a historically high rate so far this year, Rather said.
More advisors might jump onto the ETF ladder bandwagon if assets continue to grow.
“Liquidity now is not terrible,” is how ValMark's McClary describes the market. But some of the products have just a few hundred million in assets and “for the $6 billion we manage, for us, we don’t want to own the whole ETF,” he added. His firm manages only about $10 million in ETF bond ladders for individuals, due to the size constraints.
BlackRock’s Rather says liquidity isn’t usually an issue, especially as the asset base of the ETFs grows. “If you’re trading 30, 40 or 50 percent of that average daily volume, it makes sense to spread out your trades.”
“My guess is we’ll see them become more popular over time,” said Munn at Camelot Portfolios. “Defined-maturity ETFs are relatively easy to manage. For most people, they’re better than buying individual bonds.”