Target maturity and bond ladders

Target maturity: a maturity date in an ETF wrapper

An ordinary bond ETF has no maturity date. A target maturity ETF works differently: it holds bonds that mature in the same year, and the fund is then wound up. The capital is returned to investors.

In practice, this brings a familiar feature of a bond into an ETF wrapper. If you hold the product to its maturity date, the effect of interest rate changes along the way evens out. The value can swing in between, but the outcome is close to the yield to maturity at the time of purchase.

This suits a situation where you know you will need the money in a particular year: starting your studies, a renovation, retirement. You choose the ETF whose year matches your need.

A target maturity ETF does not remove credit risk, and its value can fluctuate before the maturity date. It combines the diversification of an ETF with maturity logic that resembles an individual bond, but the credit risk of corporate bonds remains.

Bond ladders

A bond ladder means splitting your bond allocation across several maturity dates. Instead of investing everything in a five-year bond, you invest one fifth each in bonds that mature in one, two, three, four and five years.

What ladders solve

The idea of a ladder is to take timing out of the equation. You don't have to guess whether right now is a good moment to lock in a rate for five years: part of the money is reinvested every year, at whatever rate prevails at the time.

This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns.