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Jumping On High Yields, Investors Head for Target Maturity Bond Funds

This small but growing fund category can offer more predictable returns.

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Securities In This Article
iShares iBonds Dec 2024 Term Corp ETF
Invesco BulletShares 2025 Corp Bd ETF

With interest rates at multi-decade highs, assets in target maturity bond funds have swelled by more than 20% this year, as investors look to capitalize on attractive yields before the Federal Reserve starts cutting.

Target maturity funds (not to be confused with target date funds) hold bonds that mature around the same date. Investors who hold such funds to maturity will likely see reasonably predictable returns. However, they should be aware that today’s attractive yields are not locked in place. They could head lower as interest rates decline, albeit potentially at a slower pace than traditional bond funds.

The Small but Growing Interest In Target Maturity Funds

The target maturity fund category holds $40 billion in assets, a fraction of the more than $5 trillion in taxable bond funds. However, the category has grown by over 40% in the past 12 months. That’s a higher growth rate than that of all but a handful of other Morningstar categories. It’s much higher than the 6.3% rise for taxable bonds as a whole and the 11.2% rise seen by the intermediate core bond category.

While there are more than 100 funds in the target maturity category, about two-thirds of the assets are in the top 10, all of which are exchange-traded funds. While there are open-end funds in the category, all the largest funds are ETFs. That top 10 consists of six funds from iShares and four from Invesco. Eight offer corporate bond funds that mature in 2024, 2025, 2026, or 2027. The remaining two are Treasury funds that mature in late 2024 and 2025.

Yields on target maturity funds range from roughly 4.5% to 5.5%, with the highest being the iShares iBonds December 2024 Term Corporate ETF IBDP, with a yield of 5.6%.

Fund Name
Fund Size ($B)
SEC Yield (%)
Invesco BulletShares 2025 Corporate Bond ETFBSCP3.95.51
Invesco BulletShares 2024 Corporate Bond ETFBSCO3.25.17
Invesco BulletShares 2026 Corporate Bond ETFBSCQ3.25.32
iShares iBonds Dec 2024 Term Treasury ETFIBTE2.85.19
iShares iBonds Dec 2025 Term Corporate ETFIBDQ2.75.56
iShares iBonds Dec 2026 Term Corporate ETFIBDR2.75.36
iShares iBonds Dec 2024 Term Corporate ETFIBDP2.65.63
iShares iBonds Dec 2027 Term Corporate ETFIBDS2.45.25
iShares iBonds Dec 2025 Term Treasury ETFIBTF2.35.11
Invesco BulletShares 2027 Corporate Bond ETFBSCR1.95.16

Why Invest In a Target Maturity Fund?

Target maturity funds are pitched as replacements for individual bonds when doing things like constructing a bond ladder—a portfolio whose individual securities are chosen so they mature at specific points in the future, such as every year. Traditional bond funds have a fair amount of leeway around the maturities of the securities they buy, even within a category. For example, a short-term bond fund could own securities maturing in one to three years, and a long-term bond fund will own debt maturing anywhere over 10 years.

However, buying individual bonds may not be appropriate for many investors, in part because the costs of building a diversified portfolio may be prohibitive. A target maturity bond fund makes creating a bond ladder more accessible to many investors. And with bond yields at multi-decade highs, it could be an opportune time to do so.

“You know when the maturity is, and you know roughly how much you’re going to get back,” explains Eric Jacobson, director of manager research for US fixed-income strategies at Morningstar. By comparison, he says, “a general intermediate bond fund … is going to range a lot” concerning the maturities in the portfolio.

Target Maturity Category Monthly Organic Growth Rate

Risks of Target Maturity Funds

There is a critical difference between owning an individual bond and a target-maturity fund, Jacobson says: “You’re not locking in the yield.” Managers of target maturity funds will sometimes trade in and out of the bonds in the portfolio, which could result in small changes to the yield paid to investors.

More significant potential changes come from money flowing in and out of the fund. As investors add money, the fund needs to buy more bonds, which may change the overall yield if interest rates have changed since the fund bought the original bonds, even though the end maturity stays the same. “Let’s say you buy the fund today, and two years from now, there’s a massive flow into the fund and interest rates are lower,” Jacobson says. “That’s going to dilute the whole portfolio’s income potential.”

He also points out that some funds, such as the Invesco BulletShares 2025 Corporate Bond ETF BSCP, have portfolios with many holdings on the lower end of investment-grade credit. This means things may be a bit more volatile during the fund’s lifetime, which poses a risk to investors who need to cash out before the bonds mature.

Jacobson does say that barring a “tail risk” kind of scenario (such as a major collapse or downgrade, like the fall of Lehman Brothers), there isn’t significant default risk to investors who hold to funds until the bonds mature.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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