Fixed maturity ETFs: what you need to know before you invest
Marketing Communication
A number of fixed income ETFs have launched in the last few years - and the new kid on the block seems to be fixed maturity ETFs.
It is a traditional bond ETF with a defined end date. These ETFs offer visibility on the estimated yield you could receive right from when you first invest. If you are looking for an easy solution to finance your future projects*, then a fixed maturity ETF could be for you.
These ETFs have a maturity date and are a type of fund that aims to replicate the performance of a group of bonds with similar maturity dates, but the fund can be traded in much the same way as individual stocks.
Most bond ETFs do not have a maturity date and instead have continuous exposure to markets.
Fixed maturity ETFs, on the other hand, have a maturity date and therefore they have an estimated yield by a given date, so they are seen as a more predictable investment.
As with any ETF, they can be sold before the maturity date at the current market value of the fund*, so they are also extremely flexible. They are particularly suitable for buy-and-hold investors because long holding periods have the potential to increase the likelihood of achieving the estimated yield.
*In the event of redemption before maturity, the investor will not benefit from the estimated return and the risk of capital loss is even greater.
Fixed maturity ETFs offer investors visibility through an estimated yield to maturity† (YTM) from the outset, though it should be noted that the YTM is not guaranteed. Investors who know the date of maturity – and therefore repayment – can outline specific objectives over their investment horizon. Fixed maturity ETFs also offer greater diversification compared to a single asset, reducing concentration risk1.
Investors with a low appetite for risk don’t want any unwelcome surprises. With fixed maturity ETFs, investors get an estimated YTM on the day they invest. Looking to buy a new car or pay for a wedding? As a fixed maturity ETF gives you an estimate of the yield you will receive, you could use it to line up your investment strategy with your personal ambitions.
A fixed maturity ETF aims to replicate performance of a group of bonds with similar maturity dates and can be traded in the same way as individual stocks. This flexibility means you can stay invested to the end date or sell at any point, but remember that selling early could increase the risk of capital loss.
Investors often consider a diversified2 portfolio comprising equities and fixed income to potentially mitigate risk. While bonds tend to give lower returns than equities over the long term, bond markets have historically been less volatile3. By diversifying and having a proportion of your investments in bonds, you could potentially realise more stable returns in the long term.
All asset classes have pros and cons. A key risk for fixed income assets, for example, is their sensitivity to changes in interest rates: when rates are lower, existing bond prices go up and new bond yields are issued at lower rates. The opposite happens when rates increase. Interest rates could, therefore, impact your investment.
What is a bond?A bond can be thought of as a loan that investors make to issuers (usually entities such as companies and governments). Bonds are a type of fixed income instrument, in that the bondholders (the investors who buy the bond and own the debt) receive fixed interest payments from the issuer and its capital is redeemed at maturity provided that the issuer does not default.
What is default risk?Default risk is one of the primary risks for bond investors. A default of the bond issuer (being companies or governments) is the failure to fulfil an obligation, especially to repay a loan. In fixed income, default risk relates to the possibility of an issuer being unable to pay its obligations, usually due to bankruptcy.
What is the coupon and maturity date?The coupon is the interest payment that bondholders earn for loaning funds to the issuer. It is paid by the bond issuer from issue date through to the maturity of the bond, which is the date at which an investment ends. It usually triggers the repayment of a loan or bond, so long as there is no default.
How is a bond’s yield different to its coupon rate?Bond yield is the return an investor makes on an investment in a bond, the yield changes depending on market conditions. The coupon rate is the stated periodic interest payment due to the bondholder at specified times.
What is yield to maturity† (YTM)?This is the overall interest rate earned by an investor who buys a bond and holds it until maturity, provided that the issuer does not default.
In an uncertain economic environment, a diversified basket of bonds can help investors achieve stable returns. Amundi ETF has recently launched a range of European government fixed-maturity ETFs. For more information, visit our website amundietf.com.
Key indices to consider:
FTSE Euro Yield+ Government 2028 Maturity Index
FTSE Euro Broad Government 2028 Maturity Index
FTSE German Government 2027 Maturity Index
FTSE Italy Government 2027 Maturity Index
Capital is not guaranteed. The actual risk can vary significantly if you cash in at an early stage and you may get back less.
1 Concentration risk refers to the potential negative consequences of having a narrow exposure to an asset or assets. That is, the risk of potential losses on a single large investment in a particular market.2 Diversification does not guarantee a profit or protect against a loss.3 Past performance is not a reliable indicator of future performance.
