Investment Q&A

Target maturity bond funds (TMBFs) can be a solid tool for the fixed income portion of a portfolio if investors understand that they approximate but do not perfectly replicate the economics of a single bond held to maturity. These ETFs hold a diversified basket of bonds that all mature in (roughly) the same calendar year as the fund’s stated maturity. As the maturity year approaches, maturing bonds are typically moved into cash or very short‑term instruments; duration converges toward zero, price volatility declines, and yield converges toward money‑market yields. On or around the stated maturity date, remaining bonds are sold and the fund is terminated; NAV is paid out in cash to unitholders and the ETF is delisted, giving an experience similar to a bond reaching par, though capital is not guaranteed. The portfolio yield to maturity reflects current market yields on the underlying bonds; as existing bonds age and as the manager adds or replaces bonds (e.g., new issues with the same maturity year, or short cash instruments near the end), the fund’s yield to maturity will drift in line with market conditions, not remain fixed like a single bond bought on day one. New investors buy at the then‑current market price (NAV) and thus lock in the prevailing YTM at their entry point, just as if they bought a secondary‑market bond on that date; they do not dilute or change the return mechanics for existing unitholders because creations/redemptions are done in kind at NAV. In the final year or so, as more of the portfolio sits in cash or cash equivalents, the effective yield increasingly reflects short‑term rates; the total return path will differ from that of a single bond that kept its original coupon all the way to maturity. The main advantage is diversification; the main con are fees.