The benefits for investors of using target-date, fixed-income exchange-traded funds (ETFs) include increased liquidity and lower expense ratios. Target-date fixed-income ETFs are relatively new investment instruments. The first such ETF, a municipal bond fund, was introduced by Blackrock's iShares in 2010. Since then the number of ETFs available in the target-date mode has steadily increased.

Target-date bond ETFs are securities that offer a payout at the security's maturity. These ETFs have portfolios consisting of bonds that belong to the same issuer class, such as corporate or municipal, which all have a similar residual maturity and mature in the same calendar year, although not necessarily all in the same month.

The definite maturity date of these ETFs makes them trade on exchanges more like individual bonds, increasing liquidity as compared to traditional bond ETFs, and therefore making buying and selling these funds easier and more cost-efficient.

Since these funds typically require less portfolio rebalancing and lower turnover rates, the expense ratio tends to be lower than that of most bond funds, which is another benefit for investors. However, like any bond fund, target-date bond ETFs carry some interest-rate risk.

Investors in target-date bond ETFs have two liquidation options. They can hold the ETFs until maturity and receive the principal amount plus coupon payments, or they can sell the ETF prior to the maturity date and receive the current market price of the shares they own, along with any coupon payment due them.

  1. Why do financial advisors dislike target-date funds?

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  2. Are target-date funds tax efficient?

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  3. Do target-date funds pay dividends?

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  1. Target-Date Fund

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  2. Exchange-Traded Fund (ETF)

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  5. Stock Exchange-Traded Fund (ETF)

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