Call me crazy, but I think these products are great, and while they are accumulating assets, I’m surprised they haven’t gathered even more.
In the past month, Guggenheim has added three new high-yield corporate bond funds and three funds focused on the investment-grade corporate space.
Nine funds now populate the investment-grade suite Guggenheim is marketing, with total assets under management of about $630 million. It also has seven corporate-junk ETFs, with combined assets of almost $485 million. Together, the 16 funds that comprise both suites now have $1.11 billion in assets.
For those who haven’t taken full measure of these products, they mature much like individual bonds, allowing investors to employ laddering strategies and otherwise manage interest rate risk.
And that’s with all the advantages of owning a diversified portfolio. If you hold them until maturity, you get back the bond-fund equivalent of par, minus expenses. “Par” is $20 a share with these funds.
Funds in the investment-grade suite, with maturities from 2012 to 2020, each cost 0.24 percent per year, and the junk-bond products—spanning maturities from 2012 to 2018, cost 0.42 percent.
They’re not as cheap as the 0.10 percent investors pay for the Vanguard Total Market Fund (NYSEArca: BND), or even the 0.15 percent they pay for the iShares iBoxx $ Investment Grade Corporate Bond Fund (NYSEArca: LQD). But then again, those conventional funds are nothing like the BulletShares.
Remember, conventional bond funds in either mutual fund or ETF wrappers don’t have maturity dates, meaning their prices can get trashed when interest rates are rising. If you happen to need to dip into principal during such a big sell-off, well, tough luck.
That said, a collapse in bond prices and an accompanying rapid rise in rates doesn’t seem like a really a big risk right now, as the U.S. economy continues through the slow slog of post-crisis deleveraging.
Still, I like the idea of being able to ride a storm out if necessary, and holding a diversified bond fund to “maturity.” Even saying that seems novel and worth repeating.
The investment-grade suite, when it’s complete, will allow investors to spread out exposure over an entire decade, which in the world of corporate debt is almost an eternity. Again, these funds have a “par” value of $20 a share, which means they’re all trading at a premium, especially the junk funds.
Looking at the weighted average yield-to-worst on the investment-grade suite, investors can get anywhere from 0.51 percent for the ETF expiring this year to 2.79 percent for the one expiring in 2017, to 3.45 percent in 2020—with each year yielding a bit more than the last, according to data Guggenheim posted on its website as of May 1.
So you can ladder out your bond holdings, adding “rungs” as new funds come to market, which Guggenheim promises to do.
For investors interested in taking on a bit more risk in exchange for a bit more income, that yield-to-worst on the high-yield Guggenheim is 2.87 percent on the fund expiring this year, and steadily ramps up each year so that the 2018 ETF has a yield-to-worst of 6.44 percent.
It makes sense to look at yield-to-worst on junk bonds in particular because high-yield debt gets called more often than investment-grade debt, which can upset income streams on bonds.
Yield-to-worst also makes sense because these Guggenheim junk funds are trading at a premium, which will diminish overall returns as they near maturity and their prices start to converge with par.
And iShares Too!
Lest I sound a bit overenthusiastic about Guggenheim, it’s worth noting that iShares markets a similar product line that focuses on municipal bonds.
The six target-maturity-date muni funds iShares currently has on the market have maturities between 2012 and 2017, and together have almost $200 million in assets. Their assets have been growing in the past two years too, but not quite as quickly as those in Guggenheim’s BulletShares.
And that makes me wonder: Why aren’t more ETF companies clamoring to get into this space of target-date-maturity bond funds?
Maybe it’s too much of a pain for fund sponsors to have to shut down funds instead of just having an open-ended bond portfolio that continually evolves and operates in perpetuity.
Or maybe investors and advisors prefer a set-and-forget approach rather than having to reinvest a chunk of money every year, thereby limiting demand for such innovative funds. Or maybe I’m missing something.
With everyone wringing their hands waiting for the great bull market in bonds to unravel, it seems a propitious time for investors to at least take a closer look at bond funds that behave quite a lot like actual bonds and figure out a creative strategy to survive the transition to higher rates.
The following nine ETFs alluded to above are the investment-grade investment funds from Guggenheim:
(NYSEArca: BSCC), (NYSEArca: BSCD), (NYSEArca: BSCE), (NYSEArca: BSCF), (NYSEArca: BSCG), (NYSEArca: BSCH), (NYSEArca: BSCI), (NYSEArca: BSCJ), (NYSEArca: BSCK)
The following seven ETFs alluded to above are the high-yield corporate bond funds from Guggenheim:
(NYSEArca: BSJC), (NYSEArca: BSJD), (NYSEArca: BSJE), (NYSEArca: BSJF), (NYSEArca: BSJG), (NYSEArca: BSJH), (NYSEArca: BSJI)
The following six ETFs alluded to above are the municipal bond funds from iShares:
(NYSEArca: MUAA), (NYSEArca: MUAB), (NYSEArca: MUAC), (NYSEArca: MUAD), (NYSEArca: MUAE), (NYSEArca: MUAF)
Our annual fixed-income conference is coming up in a little more than a week and I can’t wait.
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