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I'm looking for a mutual fund that buys bonds targeted to mature at or near a specific date, such as Dec 31, 2017, does not trade or sell the bonds, just holds them to maturity, then liquidates on that date. Anyone know of a fund like that? The "target" date funds offered by Vanguard/TRowePrice and others are a different creature. Thx!
Amrican Century offer Zero coupon bond funds that I believe liquidate at a specified date: BTTTX...2025 BTTRX...2020 BTFTX...2015 "The investment seeks the highest return consistent with investment in U.S. Treasury securities. The fund invests at least 80% of assets in zero-coupon securities. It invests primarily in zero-coupon U.S. Treasury securities and their equivalents, and may invest up to 20% of assets in AAA-rated zero-coupon U.S. government agency securities. Zero-coupon securities make no periodic interest or principal payments. The fund is managed to mature in the year 2015 and will be liquidated near the end of its target maturity year." Usually no defaut risk to impact
While I suspect that any of the funds mentioned would meet your needs, I believe none of them meet your stated requirement that they don't trade or sell bonds.
The American Century funds are zero coupon funds. But because interest is imputed, they must distribute dividends. If all investors "let it ride" (reinvested the dividends), this would be a non-event (except for tax purposes), and the funds' portfolios would remain static. But if any investor were to take a dividend in cash, the fund would be forced to sell some bonds to pay out that dividend. This might explain the 40% turnover reported in the prospectus for the 2020 fund.
Open end funds in general (this would include the Fidelity funds also) have portfolios that grow and shrink, as people buy more shares (by adding money, or simply reinvesting real - not phantom - interest payments from the bonds), or redeem them. The Fidelity 2019 fund reports a turnover of 4%. (Since turnover is the lesser of the purchases and sales, the low figure could be an artifact of people really holding to maturity and taking only interest payments, so there are virtually no redemptions/sales; in contrast, the AmCentury Zeros must redeem simply to pay out dividends, resulting in the higher turnover.)
ETFs don't have "regular" investors buying shares, but they still have the problem of what to do with the interest received on the bonds in the portfolio. Like open end funds, they buy more bonds as the interest comes in. (Then they have to sell some bonds to pay out the quarterly or monthly dividends to shareholders.) Also, when the market price dips below the NAV, authorized participants make their move - buying shares on the open market, and redeeming them for the actual bonds in the portfolio. Thus the ETF is technically selling the bonds it gives to the authorized participants in exchange for shares. (It's not really much different from an open end fund redeeming shares, except that the payment for the shares is "in kind" - rather than selling the bonds and turning over cash to the former shareholder, the ETF skips the selling step and just hands the bonds over to the authorized participant.)
The only investment structure I know of where there truly is no trading is a unit investment trust. The UIT sells a fixed number of shares (like a closed end fund), purchases bonds fitting a general profile described in the prospectus, and then holds the bonds until call or maturity. As the bonds make interest payments, these payments are passed through to the shareholders. As the bonds mature, the proceeds are likewise passed through to the shareholders. The portfolio may take a year or two to wind down, as the bonds don't necessarily mature altogether (especially if some are called early). Unlike a mutual fund (or ETF) that has flexibility to buy replacement bonds in the event of an early call, UITs just pay out the money a bit early.
Does any of this matter? IMHO, only if you want to know exactly what's in the portfolio at all times, and only if you want something that almost exactly matches the bonds' returns, rather than approximating it (fairly well), due to inflows/outflows, and the buying/selling of creation units (ETFs).
Reply to @ron: That's their sales pitch. Looking under the hood, one sees they're playing the yield curve the same as other funds.
Sales pitch - a laddered portfolio having roughly equal investments at all rungs on the ladder, so that when the shortest run matures, you can take that cash and rotate it back to become a new, longest rung.
See: http://www.thornburginvestments.com/research/articles/laddering_303.asp Look at the illustration at the top (10% on each of ten rungs). The text: "To maintain the ladder, money that comes in from currently maturing bonds is typically invested in bonds with longer maturities within the range of the bond ladder."
Reality - the management decides where on the maturity spectrum to place their bets; while they move money around, they don't seem to take any bet (maturity) completely off the table.
One can see this shift away from "neutral" by looking at the M* style boxes for THIFX. 2009-2012, the fund falls in the middle column (intermediate maturity); this year the portfolio is in the short term column.
(Note: Thornburg says that THIFX is a laddered fund: "Thornburg Limited Term Income Fund is a laddered portfolio of short/intermediate investment grade obligations ...")
Not that I think this is a bad thing - for active funds, I want managers who actually manage. This just shows it helps to look at the portfolios to see what's really going on.
Comments
BTTTX...2025
BTTRX...2020
BTFTX...2015
"The investment seeks the highest return consistent with investment in U.S. Treasury securities. The fund invests at least 80% of assets in zero-coupon securities. It invests primarily in zero-coupon U.S. Treasury securities and their equivalents, and may invest up to 20% of assets in AAA-rated zero-coupon U.S. government agency securities. Zero-coupon securities make no periodic interest or principal payments. The fund is managed to mature in the year 2015 and will be liquidated near the end of its target maturity year." Usually no defaut risk to impact
Four Target date Corporate ETFs
IBDA
IBDB
IBDC
IBDD
Article:
indexuniverse.com/sections/news/19229-ishares-debuts-more-target-date-bond-etfs.html
Guggenheim offers target date ETFs (many munis):
Article:
bonds.about.com/od/bondfunds/a/Target-Maturity-Bond-Etfs-An-Alternative-To-Laddering.htm
A look at a target date ETF that mature this year:
Case Study
The link above is the list for all the ETFs from munis, to corporates, to high yield of the target rate maturity bond funds that hold until maturity.
Edit: You will note that the Guggenheim funds are the only ones worth looking at as the IShares have about zero liquidity (volume)
https://www.fidelity.com/mutual-funds/news-analysis/defined-maturity-funds
While I suspect that any of the funds mentioned would meet your needs, I believe none of them meet your stated requirement that they don't trade or sell bonds.
The American Century funds are zero coupon funds. But because interest is imputed, they must distribute dividends. If all investors "let it ride" (reinvested the dividends), this would be a non-event (except for tax purposes), and the funds' portfolios would remain static. But if any investor were to take a dividend in cash, the fund would be forced to sell some bonds to pay out that dividend. This might explain the 40% turnover reported in the prospectus for the 2020 fund.
Open end funds in general (this would include the Fidelity funds also) have portfolios that grow and shrink, as people buy more shares (by adding money, or simply reinvesting real - not phantom - interest payments from the bonds), or redeem them. The Fidelity 2019 fund reports a turnover of 4%. (Since turnover is the lesser of the purchases and sales, the low figure could be an artifact of people really holding to maturity and taking only interest payments, so there are virtually no redemptions/sales; in contrast, the AmCentury Zeros must redeem simply to pay out dividends, resulting in the higher turnover.)
ETFs don't have "regular" investors buying shares, but they still have the problem of what to do with the interest received on the bonds in the portfolio. Like open end funds, they buy more bonds as the interest comes in. (Then they have to sell some bonds to pay out the quarterly or monthly dividends to shareholders.) Also, when the market price dips below the NAV, authorized participants make their move - buying shares on the open market, and redeeming them for the actual bonds in the portfolio. Thus the ETF is technically selling the bonds it gives to the authorized participants in exchange for shares. (It's not really much different from an open end fund redeeming shares, except that the payment for the shares is "in kind" - rather than selling the bonds and turning over cash to the former shareholder, the ETF skips the selling step and just hands the bonds over to the authorized participant.)
The only investment structure I know of where there truly is no trading is a unit investment trust. The UIT sells a fixed number of shares (like a closed end fund), purchases bonds fitting a general profile described in the prospectus, and then holds the bonds until call or maturity. As the bonds make interest payments, these payments are passed through to the shareholders. As the bonds mature, the proceeds are likewise passed through to the shareholders. The portfolio may take a year or two to wind down, as the bonds don't necessarily mature altogether (especially if some are called early). Unlike a mutual fund (or ETF) that has flexibility to buy replacement bonds in the event of an early call, UITs just pay out the money a bit early.
Does any of this matter? IMHO, only if you want to know exactly what's in the portfolio at all times, and only if you want something that almost exactly matches the bonds' returns, rather than approximating it (fairly well), due to inflows/outflows, and the buying/selling of creation units (ETFs).
That's their sales pitch. Looking under the hood, one sees they're playing the yield curve the same as other funds.
Sales pitch - a laddered portfolio having roughly equal investments at all rungs on the ladder, so that when the shortest run matures, you can take that cash and rotate it back to become a new, longest rung.
See: http://www.thornburginvestments.com/research/articles/laddering_303.asp
Look at the illustration at the top (10% on each of ten rungs). The text: "To maintain the ladder, money that comes in from currently maturing bonds is typically invested in bonds with longer maturities within the range of the bond ladder."
Reality - the management decides where on the maturity spectrum to place their bets; while they move money around, they don't seem to take any bet (maturity) completely off the table.
See: http://www.thornburginvestments.com/research/mkt_comm.asp#11
Text: "the portfolios continue to be conservatively positioned with regard to duration, with a heavy weighting towards the front end of the maturity ladder."
One can see this shift away from "neutral" by looking at the M* style boxes for THIFX. 2009-2012, the fund falls in the middle column (intermediate maturity); this year the portfolio is in the short term column.
(Note: Thornburg says that THIFX is a laddered fund: "Thornburg Limited Term Income Fund is a laddered portfolio of short/intermediate investment grade obligations ...")
Not that I think this is a bad thing - for active funds, I want managers who actually manage. This just shows it helps to look at the portfolios to see what's really going on.