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I’ve never cared much for bond funds. They never mature. Their NAV is at the mercy of Federal Reserve policy.
I like how individual bonds mature and return my investment, but I don’t want the risk of owning individual issues.
I nearly brought this question up in Mark Corothers ‘Flipin’ post, but didn’t want to send his discussion about real bond returns down the wrong rabbit hole.
So here goes. I have a CD ladder to protect me from a lost decade. I had never heard of Target Maturity Bond Funds (TMBF) until a reader asked me why I used a CD ladder instead of TMBF. His bond ladder was earning about 4.75% vs my CD ladder’s 3.8%. As the CDs in my ladder mature I plan to replace them with TMBFs.
Is there any reason why the Target Maturity Bond Funds wouldn’t also be appropriate for the bond holdings in my IRAs?
Dan, thank you for this original post and the subsequent additional information. Also thanks to others for adding valuable comments.
For me this posting/ comments was timely as I have been wanting to review my bond fund holdings across my three retirement “buckets” plus some funds allocated for other purposes. ( I just never have been motivated enough on the bond side of our portfolio to ladder individual bonds).
I used Bulletshares some years ago on a limited basis during our accumulation phase with success but never got back to it. Now in retirement for “ bucket #2” (approx 3-7+ year window) this approach seems ideal. For “ bucket #3” given the longer time frame – probably 10+ years out, I’m not as inclined yet to make the transition to target date funds but will evaluate it further in the shadow of all the knowledge on this HD post. Thanks again to all for “ news you can use”.
Dunn,
If you have a total of 10 years expenses covered with your Social Security income and portfolio withdrawals covered, you should look at either a total US or total world stock fund for bucket 3. It is rare for a bear market to exceed 10 years so bucket 3 is usually recommended to contain 100% equities for long term growth to hopefully exceed ongoing, compounding inflation. A target date fund here would result in a portfolio with an excessive amount of bonds.
Thanks David.
For a little more context- we run about a 80/20 bonds& cash/ equity mix in Buckets# 1+2 (with the equity portion in Total U.S. & Total International indices)- rebalanced annually.
Bucket#3 is typically 70/30 equity/ bonds mix.
I fluctuate the Bucket #3 mix over the years and run a higher equity mix at times after market corrections. Again, rebalance annually to my prevailing target mix.
The bonds sit in Rollover IRA, the ROTH is almost 100% equity.
BTW: I don’t disagree with the 100% equity approach in Bucket#3 ( 10+ years out) I’m just a bit conservative I guess.
This plan assumes zero future Social Security benefit will be received at 70 and later. I swore off that institution at age 29, invested and saved accordingly since and will donate anything we get from S.S. to veterans’ causes.
Dunn, thanks for your comment. I’m also grateful for everyone who added to the conversation.
Agreed. Vanguard 3,4and 5 year TMBF look compelling.
Thanks for bringing this up. Any examples of tickers for ETFs or MFs?
Ben, there are quite a few to choose from. Here’s a sample from a recent search:
The “Big Four” Target-Maturity ETF Providers1. BlackRock (iShares iBonds)
IBTG(2026) throughIBTK(2030+)IBDR(2026) throughIBDV(2030+)IBHE(2026) throughIBHG(2028+)2. Invesco (Invesco BulletShares)
BSGR(2027),BSTS(2028), etc.BSCQ(2026) throughBSCZ(2035+)BSJQ(2026) throughBSJY(2034)BSMQ(2026) throughBSMZ(2035+)3. State Street Global Advisors (SPDR MyIncome / SSGA My20XX)
MYCF(2026) throughMYCO(2035)MYHA(2027) throughMYHE(2031)MYMF(2026) throughMYMK(2031)4. Vanguard (Target Maturity Corporate Bond ETFs)
VBCA(2027) throughVBCJ(2036)Not an expert on these, but I’d note CDs are FDIC insured, and these ETFs aren’t as safe unless they’re 100% in Treasuries.
Btw, you mention not wanting the risk of individual bonds. What risk is that?
All bonds have a risk of default, the same as all companies have the risk of failure. Mutual funds provide a safety net by owning a large number of issues.
Yep. Thanks
I have been using target maturity bond ETFs for several years to build bond ladders. They have many advantages. 1) diversification. 2) If you hold it to near maturity, you eliminate interest rate risk. 3) they are liquid. If you need a little money, you can sell a little, no need to sell a whole bond. 4) You can invest $25, no need for tens of thousands of dollars to build a proper ladder. 5) You don’t pay the markup that you would pay when buying individual bonds from a dealer. There are probably other advantages too.
The ETFs buy and sell bonds during the term as money flows into and out of the fund. As the term date nears, they let the bonds mature and hold the proceeds in cash, so the yield may start to decrease as the term date approaches. This is easy to deal with; just liquidate your position and buy the next rung before the term date; problem solved.
My account is at Fidelity and I allow my term date ETFs to be borrowed by short sellers. This results in extra income when my ETFs are loaned.
These ETFs are a great tool, one of the innovations that actually are good for individual investors.
Howard, If you were to use a TIPs version of the funds you would be guaranteed to keep pace with inflation plus a couple of hundred basis points in addition. I have been performing some initial investigation into these funds for future possible investments.
As part of the investigation I decided to see what our income would be at 73 yo with the first year of RMDs based on my current traditional IRA balance (I’m hoping I will be able to convert all of my wife’s traditional to Roth by then), Social Security income, and my pension. It appears it will exceed our original target of 80k income set back around 2020 by 50%. But, then I asked AI to provide me with the increased inflation since then. The answer was 25%, so we appear to be in excellent shape.
David, I like your idea of using the TIPS in the IRA. The IRA balance will continue to grow, and you will never run out of money in the IRA if you limit your withdrawals to the minimum required. TIPS at today’s prices will continue to increase in value due to elevated inflation which I think is going to hang around for a while.
I have about 25% of my bond holdings in BlackRock iShares iBond Target-Maturity TIPS ETF as a 10-year rolling bond ladder. It is in my Roth IRA, and I view that as an “inflation-adjusted annuity” to supplement my SS benefits that I will start to receive in November at age 70.
Thanks, Bill, I appreciate you commenting.
Howard, thanks for your reply. I’m liking this product more and more.
Dan, I only became aware of them recently myself, if I’d known back then, I probably would have used TMBFs rather than going through the hassle of building an actual bond ladder. Sourcing individual issues, checking credit quality, staggering maturities… man, that was a pain in the butt. Wish someone had pointed me at these first.
I’m planning to use them going forward, though it’s a bit of a faff on my end — they’re a niche product in the UK, so I’ll actually need to open an account directly with BlackRock to get access to them.
One subtle disadvantage of TMBFs is what happens as they approach their target date. As bonds mature, the fund accumulates cash and short-term instruments, so its yield gradually converges toward cash yields — creating some “cash drag.”
An individual bond ladder doesn’t have this issue. Each bond continues earning its locked-in yield until maturity, returns principal, and I can immediately reinvest that principal into the next rung of the ladder.
I have used these type funds before. My process was to sell the year before maturity to eliminate the cash drag.
Mark, thanks, I understand. Is it safe to assume that the bonds should be maturing relatively close to the funds target date, hopefully not causing very much damage to the yield?
Dan, that is a reasonable assumption.
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