Fixed Maturity ETFs:
a Smart Alternative to Bonds?
Investing in bonds has long been a popular way to secure predictable returns and balance risks in a portfolio. But with rising interest rates and evolving financial markets, investors are looking for more flexible and diversified options. This is where Fixed Maturity ETFs (Exchange-Traded Funds) come in.
These ETFs combine the best of both worlds: they mature like bonds, trade like stocks, and offer diversification like investment funds. In this article, we’ll explore what they are, how they work, and why they might be a valuable addition to your portfolio.
What Are Fixed Maturity ETFs?
A Fixed Maturity ETF is a type of bond-focused ETF that holds a basket of bonds, all of which mature in the same year. At the fund’s maturity, investors receive a final payout, just as they would with an individual bond. However, unlike a traditional bond, these ETFs trade on the stock exchange, allowing for liquidity and ease of access.
Key Features:
– Defined Maturity Date: The ETF matures in a set year (e.g. 2026, 2028).
– Diversified Bond Portfolio: Holds multiple bonds, reducing risk compared to investing in a single bond.
– Regular Income: Some offer periodic interest payments, depending on whether the share class is distribution or accumulation.
– Flexibility: Can be bought and sold like stocks at any time before maturity
How Do They Compare to Bonds?
| Feature | Fixed Maturity ETFs | Individual Bonds | Traditional Bond ETFs |
|---|---|---|---|
| Diversification | High (holds multiple bonds) | Low (single bond) | High (different maturity dates) |
| Liquidity | High | Less liquid (OTC market) | High (but fluctuating maturity exposure) |
| Maturity Date | Yes, similar to bonds | Yes | No fixed maturity |
| Transparency | High (tracks a known index) | High | Moderate |
Why Consider Fixed Maturity ETFs?
1. Predictability and Defined Time Horizon
Like a bond, these ETFs provide an expected yield to maturity if held until the end date (which can be found in the factsheet provided by the ETF provider), helping investors plan for future financial needs like retirement or a large purchase.
2. Diversification with Ease
Instead of buying multiple bonds individually (which can be costly and time-consuming), Fixed Maturity ETFs provide exposure to a broad selection of corporate or government bonds in one investment.
3. Liquidity and Accessibility
Unlike traditional bonds, which are often traded over the counter (OTC), these ETFs can be bought and sold on an exchange at market prices, providing flexibility if you need to adjust your portfolio.
Potential Risks to Consider
While Fixed Maturity ETFs offer many benefits, they are not without risks:
1. Market Price Fluctuations
Although they mature like bonds, they are still ETFs and can experience price changes based on interest rate movements and market conditions.
2. Credit and Default Risk
If a bond issuer within the ETF defaults, the value of the ETF may decline. Investors should pay attention to the credit quality of the underlying bonds.
3. Early Exit Risk
Selling the ETF before maturity may result in a different yield than initially expected, depending on market conditions at the time of sale.
Are Fixed Maturity ETFs Right for You?
These ETFs can be a strong alternative for investors who:
– Want predictable income and a set investment period
– Prefer diversification but want bond-like maturity dates
– Need liquidity and the ability to trade easily
– Are seeking a cost-effective way to invest in fixed income
However, if you prefer direct control over bond selection or need absolute capital preservation, traditional bonds may still be the better choice. Furthermore, you should always read the KID before investing in this type of instrument. The KID is available on the product page of the ETF.
Final Thoughts
Fixed Maturity ETFs bridge the gap between traditional bonds and ETFs, offering a structured yet flexible way to invest in fixed income. Whether you’re a seasoned investor or new to bonds, they provide a compelling option in today’s changing market environment.
Discover Fixed Maturity ETFs at MeDirect:
| ETF ISIN | ETF Long Name |
|---|---|
| IE000SIZJ2B2 | ISHARES IBONDS DEC 2026 TERM EUR CORP UCITS ETF EUR INC |
| IE000264WWY0 | ISHARES IBONDS DEC 2028 TERM EUR CORP UCITS ETF EUR INC |
| IE0007UPSEA3 | ISHARES IBONDS DEC 2026 TERM USD CORP UCITS ETF USD INC |
| IE000BWITBP9 | ISHARES IBONDS DEC 2026 TERM USD CORP UCITS ETF USD ACC |
| IE0000VITHT2 | ISHARES IBONDS DEC 2028 TERM USD CORP UCITS ETF USD INC |
| IE000IHURBR0 | ISHARES IBONDS DEC 2029 TERM EUR CORP UCITS ETF EUR DIST |
Important Information:
This communication is for informational purposes only and does not constitute investment advice, an offer, or a solicitation to buy or sell any financial instrument. Investments in ETFs involve risks, including potential capital loss. Past performance is not indicative of future results. Before making any investment, please consult the key information documents.