Bond Funds

Abram918

Are there any bond funds where the only thing the fund does is: buy bonds, hold them to maturity and then pay out the coupons?

I ask this because I get the impression that most bond funds don’t hold to maturity. And/or they do other things which I don’t really understand.

I want the benefits of diversification and access to bonds not available to retail (as opposed to institutional) investors. Which benefits I don’t get if I am buying individual bonds themselves.

And at the same time I want the certainty of knowing exactly what’s going on and what I can expect and when. Which I don’t get with bond funds.

I feel like I have a fairly good understanding of how individual bonds work. (I know about coupons, yields, clean/dirty price, zero coupon bonds and all that kind of thing.) But bond funds I’m not as clear as I would like to be.

Some bond funds have performed badly. For example consider iShares ETF ‘SUSS’.

https://www.justetf.com/uk/etf-profile.html?isin=IE00BYZTVV78#chart

This is a very short maturity fund maximum 3 years. I don’t understand why it has only returned less than 2% in 3 years. I understand that the market value of a bond might fall below face value if (for example) interest rates go up. But three years should have been enough to clear this out of the fund? Or maybe it’s just because the coupons were very low for this period.

Anyway this is all just background. I’m not asking anybody here to explain all this, that would be unreasonable of me. My question is just as I have stated it at the start of this post. (Although I suspect that my question itself only demonstrates my ignorance about bond funds. As in: if I understood how bond funds work then I wouldn’t be asking it!)

Thanks!

InvesterJones

You already understand the relationship between yield and price - the eurozone is hardly brimming in confidence at the moment, especially with the political problems, so as a result companies find it hard to raise money and have to offer higher yield, and resulting prices don't do well. And I'm not sure if your 'return' figure is total return - it's a distributing fund.

I'm not aware of any current funds holding to maturity though.

Linton

Abram918 said:

Are there any bond funds where the only thing the fund does is: buy bonds, hold them to maturity and then pay out the coupons?

I ask this because I get the impression that most bond funds don’t hold to maturity. And/or they do other things which I don’t really understand.

......

You may wish to research fixed maturity date bond ETFs.  Blackrock/ishares have an "ibond" product though I do not know how available they are in the UK and which bonds are supported.

But the problem is as more you deciding to sell at a particular random date, not whether the bond fund holds its underlying investments to maturity or not.

WastedWords

iShares iBonds & Invesco Bulletshares have US Treasury fixed maturity bonds listed on LSE.
https://www.justetf.com/uk/search.html?search=ETFS&assetClass=class-bonds&bondStrategy=Maturity%2Bbonds

iBonds have a couple hedged to GBP but I believe the rest trade in USD.  Invesco's offerings are newer and tiny.   
https://www.ishares.com/uk/individual/en/themes/fixed-income/discover-ibonds-etfs#compare
https://www.invesco.com/us/en/solutions/invesco-etfs/bulletshares-fixed-income-etfs.html

There is a bigger selection, EUR & USD, including offerings from above along with Amundi and XTrackers listed on XETRA
https://www.justetf.com/uk/search.html?search=ETFS&assetClass=class-bonds&bondStrategy=Maturity%2Bbonds&ls=XETR

I have no experience with them but have been doing some research as to where to park a EUR lump sum for a year or 2.

I know Trading 212 have quite a few available. Not sure about other platforms.

OldScientist

Abram918 said:

Are there any bond funds where the only thing the fund does is: buy bonds, hold them to maturity and then pay out the coupons?

With the exception of those currently (AFAIK) only available in the US (someone has already mentioned them - https://www.ishares.com/us/strategies/bond-etfs/build-better-bond-ladders ) the answer is no.

I know you did't necessarily want an explanation but taking bond index funds with a defined maturity range (e.g., under 10 years or over 15 years, etc.) for simplicity, these will hold bonds in the particular market (gilts, investment grade etc.) that match the  maturity criteria in proportion to their issue weight. For example, the ishares under 5 year gilts accumulating ETF (IGL5) will:

Assuming no new issues or entries at 5 years: reinvest coupons and maturing bonds across all bonds meeting the maturity criteria in proportion to their issue weight.

With new gilt issues below 5 years or where existing bonds of higher maturities enter at 5 years, then transactions will be made such that the new set of assets are held in proportion to the issue weight.

With net in or outflows, the fund manager will ensure transactions leave the assets in the correct weight. The fund will also keep a small amount of cash (currently about 0.1%) to help minimise transactions.

Bond funds may be useful for those in accumulation (where liability matching may be many years away) since a rolling ladder (i.e., where maturing bonds are reinvested at higher maturities) is essentially the same as a fund. Using individual bonds for liability matching closer to retirement (e.g., a collapsing ladder) IMV plays to the strengths of bonds (i.e., a known cashflow either in nominal or real terms).