Bond ladders or bond funds? For retirement investing, it's often been one approach or the other. Both have pros and cons.
But now, three new bond fund products by Fidelity, iShares and PIMCO give smaller investors an opportunity to get more of the benefits of a bond ladder without the usual downsides of a bond fund.
PIMCO is offering what Morningstar's director of mutual fund analysis Russell Kinnel said is a fund that "in effect is its own bond ladder."
The funds, called PIMCO Real Income 2019 and PIMCO Real Income 2029, contain a variety of Treasury inflation-protected securities with several maturities in order to produce predictable monthly income.
PIMCO has applied for a patent on the technique, so it may not get much competition. The funds are designed to pay down the principal by the maturity date to maximize the payouts. Kinnel warned that the PIMCO funds are not cheap and because the income earned is taxable, they are more suitable for people who expect to be moving into lower tax brackets in retirement.
Meanwhile Fidelity approaches the challenge differently, with four defined-maturity muni bond funds launched last week.
These funds have four different maturity dates: Fidelity Municipal Income 2015, Fidelity Municipal Income 2017, Fidelity Municipal Income 2019 and Fidelity Municipal Income 2021.
With these, investors can create a ladder of funds, instead of bonds. Morningstar's Kinnel says Fidelity's goal is "to produce as high an income stream as possible up until the maturity date, while still maintaining principal." The investor selects the mix of maturities to meet anticipated income needs.
The new Fidelity funds will compete with iShares' earlier products, a set of muni bond exchange-traded funds that target each year from 2012 to 2017 and that liquidate on the maturity date with the money returned to shareholders.
Kinnel noted that the iShares funds, like nearly all ETFs, are passively managed and seek to match an index's return by creating a portfolio similar to their respective index. "Matching an index security by security isn't practical in the muni space because of the limited liquidity in munis. Thus iShares are trailblazers," he said.
