Pinpointing Fixed-Income Duration Using ETFs

Investing in fixed-income using ETFs has continued to evolve over the years to include many sophisticated strategies.  Investors now have the option to choose among a variety of duration, sector, credit, and global options.

In addition, ETF providers are now focusing their efforts on target maturity funds to mimic the defined maturity date, yield, and credit quality of an individual bond. 

The benefit of this strategy is that you maximize diversification qualities of owning multiple fixed-income securities with similar credit and duration characteristics. 

Guggenheim was the first ETF provider to incorporate this concept with their BulletShare lineup.  The BulletShare concept utilizes a unique index methodology whereby bonds are grouped together based on their maturity date. 

As an example, the Guggenheim BulletShare 2017 Corporate Bond ETF (BSCH) contains a basket of investment grade bonds that will all mature in 2017.

As the bonds in the portfolio mature, the proceeds are placed in cash until the ETF is finally liquidated and all proceeds are returned to shareholders.  This is similar to the process an individual bond goes through when it reaches the preset maturity date. 

Once the ETF is liquidated, investors have the option to purchase another fund farther out on the ladder or perhaps wait in cash for other opportunities.  Currently the longest dated ETF in the lineup is the Guggenheim BulletShares 2022 Corporate Bond ETF (BSCM) and several high yield options exist as well. 

From a practical standpoint, these ETFs allows you to position yourself at a specific point on the yield curve, which can be beneficial in circumstances that warrant special attention to interest rate fluctuations. 

In addition, if you are a more avid trader, you can strategically shorten and elongate your fixed-income duration based on the prevailing interest rate environment.   This allows you a heightened level of control with respect to your portfolio yield and effective duration.

The BulletShares concept can be implemented successfully when building a bond ladder as well.  You can select multiple securities that fit specific yield requirements and continually refresh them as the ETFs are converted to cash. 

With so much uncertainty surrounding the future of interest rates, fixed-income investors need to be utilizing every tool necessary to maintain a healthy income stream and minimizing loss of capital.