1. User Chris W. Rea answered:

When interest rates rise, the market value of 20-year bonds will drop, and drop more than shorter-term bonds would. Your principal is not protected in the short term. Principal is only guaranteed returned at the 20-year maturity of those bonds. But, oops, there is no maturity on the 20-year bond ETFs because every year the ETF rolls the 19-year positions into new 20-year positions! ;-)

2. Moderator JoeTaxpayer answered:

A bond ETF will hold a basket of many, many bonds. As individual bonds mature, the fund reinvests in newer ones. These can be newly issued bonds or existing ones in the secondary market with time till maturity.

3. Should You Worry About Bond Mutual Funds if Interest Rates Rise?, By Rob Williams (His Linkedin), September 16, 2014

Bond funds, on the other hand, don't have a set maturity date. You may find that when you need to get your money back, you have to sell shares—and these shares may fetch a lower price than when you initially bought them in a rising-rate environment.

Question 1: Please explain the bolded? How's there no maturity? 2 asserts that there is?

Question 2: How does 3 figure in my confusion? I know that a bond ETF can operate as long as desired by the open-end investment companies or unit investment trusts, but no maturity?

1 Answer 1


When you invest in an ETF or mutual fund, you're not investing in stocks or bonds. You're buying shares of a company that invests in stocks or bonds. This level of indirection is what makes it so bond funds do not 'mature.'

Bonds inside of ETFs or mutual funds do have a maturity date. When they mature, the fund manager uses the principal value that is returned to purchase another bond that meets the investment objectives of the fund. So the fund never matures, since it is always investing in more bonds when the old ones mature.

Unit investment trusts made of bonds do have a maturity date as well, since the portfolio does not change once the UIT is issued. As the individual bonds in the portfolio mature, the principle value is returned to investors. So the overall maturity date is effectively the maturity date of the last bond in the trust.

All of the statements quoted above are accurate in explaining why there is no guarantee of a return of principle when investing in bond funds (ETF or open-ended mutual fund). The bonds they hold do mature, but are replaced within the fund as needed. The investor will never see it happen unless they watch the holdings reports filed by the funds.

The only way to have an assurance of the return of principle is to invest in individual bonds, or in unit trusts made up of bonds.

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