Calculating Returns On Target Date Bond ETFs

What Is a Target Date Bond ETF?

A relatively new type of bond investment is the target-date bond fund.

Unlike a conventional bond fund, where there is frequent turnover of the bonds in the fund to keep it adjusted to its target average maturity, a target-date bond fund holds a portfolio of bonds that all mature in the same year. Instead of turning over the bonds frequently, the fund holds the bonds until they mature, then collects the principal from the bonds and pays out the full amount collected as a final distribution. Meanwhile, in the years before maturity of the bonds, the bond fund pays out the interest it collects on the bonds as monthly distributions to the fund shareholders.

These target-date funds are exchange-traded funds that trade on the stock exchange like any other ETF. They can be purchased and sold at any time in any regular stock brokerage account – there is no need to have an account with the bond fund itself.

Benefits of Targeted Date Bond ETFs

These funds are designed to give the advantages of holding bonds to maturity – predictable future results, lack of price risk, assured income stream – together with the advantages of exchange-traded funds – convenience, instant liquidity, and a low per-share price of around $20-25 that allows any investor to create a diversified bond portfolio no matter the size of their personal portfolio.

Common Questions about Target Date Bond ETFs

We track several portfolios which contain shares of these target-date bond funds as part of their steady-income allocation.

There are some frequently asked questions about these funds, encapsulated pretty well by a letter we received recently which asks:

Q: What are the calculations for the interest and final balance of a bond fund ETF?

A: Example:

$20,000 in Bond Fund ETFs

Yield to maturity = 2.09%

Distribution Yield= 2.61%

Maturity two years

Current fund price per share $21.26

Shares held = 20,000 / $21.26 = 940 shares with $15.60 cash left over

Q: You mentioned in the Strategic Investor class that the amount received as the final distribution when the fund matures may be higher or lower than the amount paid for the shares.

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