A lot of investors use bonds for one simple reason: to generate income with lower volatility than stocks. One of the most common ways to structure this is through a bond ladder.
A basic Treasury bond ladder might look something like this: an investor splits capital evenly across Treasury securities maturing in one, two, three, four and five years. As each rung matures, the proceeds can either be spent or rolled into a new five-year Treasury.
Bond ladders can help match future liabilities or spending needs, such as retirement withdrawals or tuition payments. They can also improve cash-flow planning and liquidity management because investors know exactly when principal is scheduled to return.
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The issue is that building a ladder yourself can be cumbersome. For Treasuries, many investors use TreasuryDirect.gov, the U.S. government’s platform for buying bonds directly. The website, however, has developed a reputation for its dated interface, clunky navigation and poor user experience.
Some investors may instead seek higher yields through corporate bonds issued by companies rather than the U.S. Treasury Department. While these can be purchased through brokerages, individual bond trading comes with its own challenges.
Unlike stocks, bonds largely trade over the counter rather than on centralized exchanges. Pricing can be opaque, spreads can vary significantly, and retail investors are often dealing with institutional bond desks that have more information. There is also more complexity involved. Looking at the coupon and current market price alone is not enough because bonds can trade above or below their face value.
Investors also need to understand metrics such as yield to maturity, which estimates the annualized return if the bond is held until maturity. Duration is another key concept. It measures interest rate sensitivity. All else equal, rising interest rates hurt bond prices while falling rates help them.
These income-building funds are designed to mature in a specific calendar year, similar to an individual bond, while still retaining the diversification, transparency and liquidity advantages of ETFs.
To simplify things, asset managers packaged bonds into exchange-traded funds (ETFs), that benefits such as monthly distributions, diversification and stock-like liquidity with transparent bid and ask pricing throughout the trading day.
Traditional bond ETFs, however, come with one major limitation. Most hold evergreen portfolios designed to maintain a constant maturity profile. As holdings age and fall outside the desired maturity range, they are replaced. That means investors cannot simply hold the ETF to maturity and automatically receive principal back the way they would with an individual bond.
To bridge this gap, ETF issuers launched target maturity bond ETFs. These income-building funds are designed to mature in a specific calendar year, similar to an individual bond, while still retaining the diversification, transparency and liquidity advantages of ETFs.
What is a target maturity bond ETF?
Target maturity bond ETFs are usually easy to identify because the maturity year is included directly in the fund’s name. You will commonly see labels such as 2026, 2027, 2030 or 2040.
Unlike traditional bond ETFs, which hold an evergreen portfolio spanning many maturities, target maturity bond ETFs hold bonds designed to mature in the same calendar year. That structure makes them behave more similarly to an individual bond ladder.
When you buy one of these, you still receive the standard benefits of a bond ETF. The fund pays periodic monthly distributions rather than semi-annual coupon payments, and the ETF itself trades throughout the day with a net asset value (NAV) that fluctuates based on the value of the underlying bonds.
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The key difference appears as the ETF approaches its maturity year. Instead of continuously replacing bonds to maintain a constant duration profile, the portfolio gradually winds down. The bonds mature, proceeds shift into cash and cash equivalents, and eventually the ETF itself liquidates.
From there, investors receive a final distribution based on the fund’s NAV after liabilities. This process is designed to mimic the principal repayment of an individual bond at maturity. For example, according to BlackRock and its iShares iBonds lineup, an investor’s total return (represented by yield to maturity) comes from two components:
- Periodic monthly income distributions; and
- The final end-date distribution upon ETF’s termination.
These two components interact with each other. All else equal, if the ETF distributes more income along the way, the final payout tends to be smaller. Conversely, if periodic distributions are lower, more value remains for the end-date distribution.
For iShares specifically, most iBonds ETFs terminate toward the end of the designated maturity year, typically around October through December. Once the underlying bonds mature and the portfolio transitions to cash, the ETF is liquidated and shareholders receive the remaining NAV.
Importantly, target maturity ETFs can still vary substantially depending on the underlying bonds they hold. Most providers offer lineups for U.S. Treasuries and investment-grade corporate bonds, but some also offer high-yield bonds, municipal bonds and Treasury Inflation-Protected Securities (TIPS).
Matching the ETF’s maturity profile to your actual time horizon for income needs remains important.
These categories differ in terms of credit quality, yield and volatility, allowing investors to tailor a bond ladder around their own risk tolerance. Even so, target maturity bond ETFs are still exposed to duration risk. A fund maturing in 2040, for example, will have a higher duration than one maturing in 2027.
That means changes in interest rates can still significantly impact the ETF’s price before maturity. Falling rates can boost prices, while rising rates can hurt them. Matching the ETF’s maturity profile to your actual time horizon for income needs remains important.
Finally, unlike owning an individual bond directly, you will pay an ongoing expense ratio. This annual fee is deducted from the fund’s returns and directly reduces yield and total return over time.
For example, a target maturity ETF charging a 0.50% expense ratio would create roughly $50 in annual fee drag on a $10,000 investment. Since the 30-day SEC yield is quoted after expenses, keeping fees low is especially important for income-focused investors.
How we picked the best target maturity bond ETFs
Bond ladders are composed of multiple bonds with staggered maturities. The same principle applies when building one with target maturity bond ETFs. Because investors will typically need several ETFs rather than just one, it was not really practical to crown a single “best” ETF in this category.
In many cases, the primary distinguishing feature between funds is simply the maturity year itself. Instead, we chose to profile four of the largest providers in the space and focus on the part of each lineup that stood out the most.
- For iShares, we focused on the iBonds Treasury target maturity bond ETFs.
- For Invesco, we focused on its BulletShares high-yield target maturity bond ETFs.
- For State Street, we focused on its MyIncome municipal bond target maturity ETFs.
- For Vanguard, we focused on its investment-grade corporate bond target maturity ETFs.
For every ETF discussed, we also highlighted key metrics such as the 30-day SEC yield, expense ratio, assets under management and liquidity. For each provider, we also selected a group of ETFs that could hypothetically be combined into a three-year bond ladder suitable for an investor starting today.
Remember, this is simply an illustrative example designed to demonstrate how these ladders can be structured in practice. Actual portfolio construction will vary depending on an investor’s time horizon, risk tolerance, income needs and interest rate outlook.
One advantage of this category is that many providers now offer dedicated ladder-building tools. For example, iShares offers an iBonds ladder calculator that helps investors estimate metrics such as weighted average yield to maturity and acquisition yield, while also showing how factors like premium or discount pricing and expense ratios affect expected returns.
iShares iBonds Treasury ETF Ladder
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- iShares iBonds Dec 2027 Term Treasury ETF (IBTH)
- iShares iBonds Dec 2028 Term Treasury ETF (IBTI)
- iShares iBonds Dec 2029 Term Treasury ETF (IBTJ)
The Treasury component of the iShares iBonds lineup is notable for its low costs and strong liquidity. All three ETFs charge a 0.07% expense ratio, or $7 per year for every $10,000 invested, and each currently trades with a relatively tight 30-day median bid-ask spread of roughly 0.04% to 0.05%.
The funds are also well capitalized. IBTH currently holds $2.2 billion in assets under management, IBTI about $1.8 billion, and IBTJ roughly $1.3 billion. That scale materially reduces concerns around premature closure due to lack of investor interest. In terms of income, as of June 23, IBTH offered a 3.8% 30-day SEC yield, IBTI 4.0%, and IBTJ 4.0%.
U.S. Treasury securities held by these ETFs remain among the safest fixed-income instruments globally. While U.S. government debt has been downgraded from AAA to AA by some ratings agencies, Treasuries are still generally treated as effectively risk-free in practice from a default perspective.
Treasury interest also receives favorable tax treatment. Income from Treasuries is generally exempt from state and local taxes, whereas corporate bond income is typically taxed as ordinary income at both the federal and state level.
Learn more about IBTH, IBTI and IBTJ at the iShares iBonds provider site.
Invesco BulletShares High-Yield ETF Ladder
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- Invesco BulletShares 2027 High Yield Corporate Bond ETF (BSJR)
- Invesco BulletShares 2028 High Yield Corporate Bond ETF (BSJS)
- Invesco BulletShares 2029 High Yield Corporate Bond ETF (BSJT)
High-yield corporate bonds, also known as junk bonds or non-investment-grade bonds, are bonds carrying ratings below BBB. Credit ratings are assessed by the three major agencies: S&P Global, Moody’s and Fitch Ratings. Within the high-yield market, the highest-rated segment starts at BB, followed by single-B and then CCC or CC-rated securities lower down the spectrum.
These bonds carry materially higher credit risk than investment-grade debt. There is a greater possibility that issuers may fail to make coupon payments or repay principal at maturity. One way to measure this risk is through cumulative default rates.
According to S&P Global, BBB-rated bonds, the lowest rung of investment grade, historically showed a three-year cumulative default rate of just 0.91%. Move down to BB-rated bonds and that figure rises to 4.17%. For single-B bonds, it climbs further to 12.41%. At the CCC/CC level, the three-year cumulative default rate reaches 35.67%.
Investors are compensated for accepting that higher risk through materially higher yields. Currently, the Invesco BulletShares lineup offers sizable 30-day SEC yields: BSJR at 5.6%, BSJS at 5.7%, and BSJT at 6.5%. The longer maturities generally contribute to the higher yields in the later-dated funds.
Investors using the BulletShares high-yield lineup should also pay attention to fees and taxes. These ETFs charge a 0.42% expense ratio, which is reasonable for riskier credit exposure, but notably higher than Treasury or investment-grade target maturity ETFs.
Tax efficiency is another consideration. Because these ETFs hold corporate bonds, distributions are generally taxed as ordinary income at both the federal and state levels. For investors in higher tax brackets, particularly in states such as California and New York, this can materially reduce after-tax yield.
Liquidity is also worth monitoring. Under normal market conditions, these ETFs trade efficiently, but during periods of stress, high-yield corporate bonds can become materially less liquid than Treasuries. Investors should expect wider bid-ask spreads during periods of market turmoil.
Learn more about BSJR, BSJS, and BSJT at the Invesco BulletShares provider site.
State Street MyIncome Municipal ETF Ladder
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- SPDR My2027 Municipal Bond ETF (MYMG)
- SPDR My2028 Municipal Bond ETF (MYMH)
- SPDR My2029 Municipal Bond ETF (MYMI)
For some investors, particularly those in higher tax brackets, tax efficiency can matter more than headline yield. Investment-grade corporate bonds are generally the least tax-efficient option discussed so far because their distributions are taxed as ordinary income at both the federal and state levels. Treasury bonds offer some improvement because interest is typically exempt from state and local taxes.
If your goal is avoiding federal income taxes while building a bond ladder, municipal bond ETFs may be more appealing. One option is the State Street MyIncome municipal bond lineup. A simple three-year ladder could be built by allocating evenly across MYMG, MYMH and MYMI.
These ETFs charge a 0.20% expense ratio, placing them roughly midway between the lower-cost iShares Treasury iBonds lineup and the more expensive Invesco BulletShares high-yield ETFs. Liquidity remains reasonable, as all three ETFs currently trade with 30-day median bid-ask spreads of 0.08%.
The funds are relatively new and currently modest in size, with MYMG and MYMH each holding just under $10 million in assets under management, while MYMI sits closer to $14 million. Despite the lower AUM, the risk of liquidation appears limited given State Street’s scale, distribution network and brand recognition, which should support future inflows.
Headline 30-day SEC yields currently stand near 3% for all three target maturity bond ETFs. On the surface, those yields may appear lower than taxable Treasury or corporate bond ETFs, but municipal bond investors should instead focus on the tax-equivalent yield.
The tax-equivalent yield estimates the yield a taxable bond ETF would need to generate to match the already tax-free income from a municipal bond ETF. Using the highest marginal federal tax bracket, State Street estimates tax-equivalent yields of 4.8% for MYMG, 4.8% for MYMH, and 4.9% for MYMI.
Learn more about MYMG, MYMH and MYMI at the State Street MyIncome provider site.
Vanguard Target Maturity Corporate ETF Ladder
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- Vanguard Target Maturity 2027 Corporate Bond ETF (VBCA)
- Vanguard Target Maturity 2028 Corporate Bond ETF (VBCB)
- Vanguard Target Maturity 2029 Corporate Bond ETF (VBCC)
Vanguard is one of the newest entrants to the target maturity bond ETF space, and so far, its lineup has focused exclusively on investment-grade corporate bonds. These are loans issued by companies rated at least BBB by the major credit agencies.
In practice, however, Vanguard’s portfolios also carry substantial allocations to higher-quality A-rated debt, along with smaller allocations to AA and even some AAA-rated securities. Notably, only two U.S. companies currently maintain AAA credit ratings: Microsoft (MSFT) and Johnson & Johnson (JNJ).
In terms of yield, Vanguard’s target maturity corporate bond ETFs generally sit between Treasuries and high-yield bonds of similar maturity. Currently, VBCA offers a 4.2% 30-day SEC yield, VBCB yields 4.4%, and VBCC yields 4.6%. The increase in yield across the ladder reflects the additional maturity risk investors take on with the later-dated ETFs.
This segment tends to sit in a “Goldilocks zone” for many investors. Compared to Treasuries, investment-grade corporate bonds provide meaningfully higher income. Compared to high-yield bonds, they carry materially lower default risk. That combination makes them more of a balanced, jack-of-all-trades option for ladder construction.
The trade-off is tax efficiency. Like other corporate bond funds, distributions are generally taxed as ordinary income at both the federal and state levels. While the yields are lower than high-yield bonds, taxation can still meaningfully reduce after-tax income in taxable accounts.
In classic Vanguard fashion, however, the lineup remains very inexpensive. All three ETFs charge a 0.08% expense ratio.
Learn more about VBCA, VBCB and VBCC at the Vanguard Target Maturity provider site.