This ETF acts like a bond and will give $800 million back to investors

'Swallowing hard' and sending checks to clients, Guggenheim sticks with strategy for advisers.

It’s the opposite of how most fund companies operate. But on Dec. 31, Guggenheim Investments expects to let about $800 million head out the door from just one product line. At the end of next year, that number is expected to more than double, to an estimated $1.7 billion.
The swelling dollar figure symbolizes both the blessing and the curse of offering an exchange-traded fund strategy that acts almost exactly like an individual bond.
Since launching four years ago, the Guggenheim BulletShares corporate and high-yield bond ETFs have grown to more than $6 billion, despite the year-end roller-coaster ride that involves sending checks to investors as another ETF matures.
“We swallow hard and we give the money back,” said Bill Belden, Guggenheim managing director.
It was always part of the design that an ETF modeled after a bond would mature and money would be returned to investors. But it is still an unusual strategy in the asset management space, and the numbers keep growing.
The BulletShare ETFs are managed to hold more than 150 individual corporate or high-yield bonds that mature during the year of the ETF’s set maturity date. This means that the entire ETF sets a final price on Dec. 30 and liquidates the next day.
In 2011, that meant sending out checks worth $35 million. The next year it was $175 million. Last year it was $400 million. The pattern is clear.
Guggenheim has 11 investment-grade bond BulletShare ETFs, maturing annually through 2024, and nine high-yield bond versions, maturing annually through 2022.
BlackRock Inc., which launched its own version of set-maturity bond ETFs in 2010, has seen a similar pattern of asset flows. But with just $970 million in 16 iSharesBonds, the dollar amounts are smaller.
BlackRock’s version of the set-maturity ETFs are unique in that the suite only includes ETFs that mature every other year, and the maturity dates are set in March and December.
The BulletShares, launched as an experiment to help financial advisers navigate the risks of a rising interest rate cycle, have since emerged as a tool for bond laddering.
Even if they don’t act as perfect proxies for individual bonds, any differences can be overlooked as a trade-off of the ease of use at the portfolio allocation level, according to Wayne Schmidt, chief investment officer at Gradient Investments.
“It’s very difficult for individual investors to compete with institutional investors when it comes to buying individual bonds,” said Mr. Schmidt, who uses BulletShare ETFs to build bond ladders on a subadvisory basis for other financial advisers.
Among the key advantages to the ETFs over individual bonds, he added, are diversification across multiple bonds, as well as ease of buying and selling.
But even though the set-maturity bond ETFs are designed to be held to maturity, which they almost always are, investors must be mindful of the monthly dividend payments and the fact that yields can fall off during the final year of maturity.
For example, if an ETF is maturing at the end of 2015, all the underlying bonds will be maturing at various points during the year because it would be impossible to structure it for all those bonds to mature on the ETF’s year-end maturity date.
Mr. Schmidt said that particular hitch starts to show up early in the final year of an ETF’s maturity, when the share-price premium starts falling closer to the net-asset-value.
As underlying bonds start to mature, the ETF will have to move that money into lower-yielding cash-equivalents.
“We have found that an optimal time to roll out of one of these ETFs is the February-March timeframe of the final year of maturity,” Mr. Schmidt said.
Mr. Belden said redemptions prior to maturity have been rare, and he admits that January has been the biggest month for new money going into the BulletShares, so he assumes they are retaining a lot of investors.
Though he acknowledged that the idea of letting investors go by sending them a check creates an uneasy feeling in some corners at Guggenheim, he added that the policy isn’t likely to change.
“We believe that the credibility and integrity of the product is best served by the way we’re doing it now,” he said.