In January 2010, BlackRock’s iShares division introduced the first six defined maturity ETFs, which are focused on the municipal bond market. Each ETF holds a portfolio of bonds maturing between June 1 and August 31 of a referenced year and are designed to provide a yield to maturity consistent with a diversified portfolio of bonds maturing in that year. Bonds included in the ETFs’ reference indices are non-callable, investment grade, and AMT-free. Recently, Claymore Advisors issued seven definedmaturity investment grade corporate bond ETFs.

Defined maturity ETFs can be useful tools for implementing or plugging holes in existing bond ladders, matching maturities with anticipated major expenses, and can enable investors to target specific positions on the yield curve. While investors will have a fairly accurate gauge of the yield to maturity at the time of purchase, the major complexity of defined maturity ETFs is that distributions and final maturity values are likely to fluctuate in offsetting directions.

Introduction

Fixed income has been a primary driver of ETF asset growth over the past two years. By our estimates, fixed income ETFs have taken in roughly $85 billion in net new assets since the beginning of 2008, which is equivalent to roughly 26% of the total new assets raised in US-listed ETFs. During that time, 54 additional fixed income ETFs have been issued, bringing the current number to 100, and the fixed income share of the ETF market has increased from 5% to 16%. While many of the more recently issued fixed income ETFs have targeted new markets such as international corporate bonds, low duration, and convertible bonds, the defined maturity structure marks an important and significant evolution in the ETF industry.

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