After being on the market for more than a decade, defined maturity bond funds are finally attracting attention. Over the past two years, investors have piled into the unique exchange-traded funds, which provide diversity like traditional ETFs, but have maturities and liquidate like a bond. Investors simply choose an ETF with a particular year of maturity, and own a small slice of hundreds of bonds in the fund that mature that year. Traditional open end, bond mutual funds or bond ETFs, on the other hand, have no maturity date. “You get the advantage of having a fixed date that you know the investment is going to mature and pay proceeds,” explained financial analyst Charles Rotblut, vice president of the American Association of Individual Investors. “On the other hand, you don’t have the customization as if you were going to go buy your own set of bonds with differing maturity dates,” he added. One big advantage over owning individual bonds, however, is that defined maturity ETFs are easy to purchase on the stock exchange. “Bonds are really not the first go for retail investors, considering the legwork that’s required, the high minimum initial investments,” explained Sarajat Samant, an analyst with Morningstar’s fixed income manager research. “These defined maturity ETFs are a way for retail investors to actually invest in this, because they give the diversity, they have low fees and they are trying to mimic this individual bond behavior.” BlackRock’s iBond suite of defined matury bond funds, for example, has seen its net assets more than double over the last couple of years, said Karen Veraa, head of BlackRock’s iShares U.S. fixed income strategy. The firm — the largest ETF manager in the U.S. — currently has 47 iBonds on the market across investment-grade corporate debt, Treasurys, high-yield, municipal bonds and Treasury inflation-protected securities. “A lot of financial advisors and individual investors are looking for ways to lock in these yields and buying an iBond and holding to maturity is one of the simplest ways to do it,” Veraa said. IBonds have received $7.7 billion in new investor money so far this year. The most, $3.8 billion, went into corporate iBonds, trailed by $3.1 billion into government funds. The other big player in the space is Invesco, which calls its product BulletShares . Invesco — a distant fourth among ETF managers — has 28 investable BulletShares ETFs, and three more that are about to mature. The Invesco ETFs have seen nearly $4 billion in inflows so far this year, down from about $4.9 billion in 2022, but still far more than $2.3 billion 2021 and $2.2 billion in 2020. How they work Each defined maturity bond fund holds securities in the same sector that come due in the calendar year chosen for the fund. So, for instance, BlackRock’s 2024 Treasury iBond only holds Treasurys and only those that mature in 2024. IBTE YTD mountain iShares iBonds Dec 2024 Term Treasury ETF At BlackRock, any asset that matures in the first six months of the year of maturity gets reinvested in bonds that mature by year end. Anything maturing in the final six months is put into a money market fund, so that by the time the fund matures around Dec. 15, it is 100% in money market funds. Once the fund matures, it is delisted from the stock exchange, Veraa explained. “Basically, you get your money back after maturity happens and along the way it will pay out monthly income,” she said. Because of the reinvestments, the amount of the monthly income will vary slightly since yields can shift, she added. Portfolio managers also closely watch to make sure there are no downgrades of investment grade bonds, which may mean removing a bond from a fund, said Jason Bloom, head of fixed income and alternative ETF strategy at Invesco. How to invest While investors can choose their ETF based on their risk tolerance — going for safety in a Treasury fund or taking more risk and more income with a high-yield fund— they can also manage duration and reinvestment risk by laddering the funds . For instance, in a 5-year bond fund ladder, if rates are lower one year from now than they are today, only 20% of the portfolio will have to be reinvested at lower rates. The rest were locked into those higher rates. Conversely, if rates move higher, you don’t need to worry about selling bonds at a loss, Invesco’s Bloom said. If you hold to maturity, absent defaults, you’ll receive the expected yield to maturity, he said. BSCR YTD mountain Invesco BulletShares 2027 Corporate Bond ETF “It is very difficult to forecast future changes in interest rates,” he said. “The way you manage that risk is you ladder out a range of maturities and you haven’t put all your eggs in any one basket where at any one point in time I’m forced to reinvest my whole portfolios in a different rate environment.” BlackRock’s Veraa said the most popular ladders remain one to five years, but said the team has been getting more requests to look at three to seven year ladders. Like every security, there are risks involved, said Morningstar’s Samant. For one, the price of the ETFs will fluctuate through the life of the ETF, so if you need to sell before maturity you’ll be subject to price volatility in the market, she said. “You have to wait until maturity to get the benefit,” she said. They can also see defaults, as well as have bonds called away from the fund. Callable bonds are simply those that can be redeemed or paid off by the issuer prior to the bonds’ maturity date, according to the Securities and Exchange Commission. “If a bond matures early or it’s called early, that can affect the yield of that particular ETF that was shown before,” Samant said. Invesco’s Bloom said when it is understood a bond will be called before its maturity date, Invesco may put the bond in a fund with a maturity that matches the call date instead. Ideally, to get the full total return on the fund, buy it as close to the day of launch as you can, suggests AAII’s Rotblut. While many of the ETFs trade close to the underlying value of their assets, they are trading on the open market and can be subject to price premiums or discounts, he said. “These are really meant to be something you buy and hold,” he said. “They are not meant to be trading vehicles.” However, if you want to reinvest the money after the fund matures, Rotblut suggests considering getting out a little earlier than the termination date as most of the bonds mature and roll into cash. If you are saving for something specific, like a down payment on a house, there is no need to do so, he added. Looking ahead Both Invesco and BlackRock expect the popularity of the funds to continue, even when rates stop rising and eventually rate cuts take hold. “Regardless of the rate environment, people are generally underweight fixed income,” said BlackRock’s Karen Veraa. “This is going to be a valuable tool that will continue to grow.” Investors worried about rates can also precisely target one point in the yield curve that’s attractive, and then hold to maturity, Invesco’s Bloom pointed out. “You don’t have to worry about whether the portfolio is going to be selling bonds and buying bonds or moving you to a different part of the curve next month or next year,” he said.