Corporate, Treasury, and Credit Bond Funds
The array of bond ETFs available covering distinct maturity buckets and credit qualities makes for a wide range of possibilities to help fine-tune an investor's fixed income exposures. For example, they can be used to manage a portfolio's duration—either shorten or lengthen to adjust opportunistically as interest rates change. Fixed income ETFs can also be layered on for potential yield enhancement, as in the case of using a credit or high yield ETF on top of a predominantly Treasury-based portfolio.
FAQs
- Q. What is the average yield to maturity?
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A. Yield to Maturity (YTM) is the discount rate that equates the present value of a bond's cash flows with its market price (including accrued interest). The Fund Average YTM is the weighted average of the fund's individual bonds holdings' YTMs based upon Net Asset Value ("NAV"). The measure does not include fees and expenses.
- Q. What is effective duration?
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A. Effective duration, like duration, measures the sensitivity of a bond's price to a change in interest rates. An effective duration of 2, for example, means that the price of the bond would decrease/increase by 2% if the interest rate increased/decreased by 1%.
Effective duration takes into account the embedded options within a bond to derive a realistic measure of the bond's interest rate sensitivity. For corporate and municipal bonds, the typical embedded option is a call option, which allows the issuer to call or pay off the bond should interest rates fall. For mortgage-backed, collateralized mortgage obligations and asset-backed securities, the embedded option consists of a prepayment option held by the borrower allowing for early payoff of the underlying loans. Because both call and prepayment options are held by the borrower, effective duration will in general be less than duration to stated maturity.