Now let’s compare these with other corporate bond ETFs. You can visit the website for Claymore’s 1–5 Year Laddered Corporate Bond ETF (CBO) and learn that it has a duration of 3.07, which makes it comparable to the RBC Target 2014 ETF. You’ll also see that he yield to maturity of CBO is almost identical at 2.29%. Meanwhile, the iShares DEX All Corporate Bond Index Fund (XCB) has a duration of 5.78, which is very close to that of the RBC Target 2018 ETF. Again, the yield to maturity of XCB is virtually the same as the comparable RBC fund: in this case, 3.25% versus 3.21%.
The only difference here is that CBO and XCB will always have approximately the same duration. The durations of the RBC funds, however, will get shorter every year as the fund approaches the target maturity date.
How to put these ETFs to work
So how might a target maturity bond ETF fit into your portfolio? You might use them to fund a future obligation on a specific date: if you know that you will need your money in 2015 for a down payment, you could buy the RBC Target 2015 ETF instead of putting it in a savings account or buying a four-year bond or GIC rates. You’ll receive interest payments for the next four years, and then have your money returned to you at the end of that period.
Target maturity ETFs do have some advantages over individual bonds. The first is diversification: each RBC fund holds 20 to 50 issues. Another advantage is that you can invest small amounts, which is difficult to do with individual corporate bonds. You can also add new money to your investment whenever you want—although you’ll incur a trading commission each time.
The RBC funds carry a management fee of 0.30%, which you would not pay if you bought individual bonds. However, the retail spread on individual bonds can be very high (and hidden), especially if you’re buying from a discount brokerage. In many cases, the ETF will be a better deal in the end.
RBC’s new ETF website suggests that you can also use these products to build a bond ladder. Presumably they will launch a new ETF every year beginning in 2013, to replace the one that gets liquidated, allowing investors to maintain an eight-year bond ladder indefinitely.
However, for long-term investors who do not have a specific time horizon, a traditional bond ETF is almost surely a better choice. First, the fixed income side of a portfolio should include government bonds as well as corporates. And second, if you do hold corporate bonds, a single fund such as CBO or XCB will be more manageable and less expensive in the long run than building a ladder with these ETFs.
Got a question about index investing? Send it to [email protected] and it may be answered in a future installment of “Ask the Spud.” Answers are provided as information only and do not constitute investment advice.