Summary
- The Invesco BulletShares 2024 Corporate Bond ETF is a maturity matched corporate bond fund.
- The collateral is composed of a pool of investment grade U.S. corporate bonds, which mature before December 2024.
- The fund eliminates any market risk via its maturity matching, and given its investment grade profile default probabilities are low.
- Although very stable and robust, the meteoric rise in risk free rates in the front end of the curve has diminished the appeal of BSCO.
- The fund's collateral has a 1.28 years effective duration.
Thesis
The Invesco BulletShares 2024 Corporate Bond ETF ( BSCO ) is a fixed income exchange traded fund. The vehicle holds a portfolio of investment grade corporate bonds which have maturity dates throughout 2024. The fund itself, via its incorporation docs is set to mature at the end of 2024:
The Fund will terminate on or about December 15, 2024 without requiring additional approval by the Board of Trustees (the “Board”) of Invesco Exchange-Traded Self-Indexed Fund Trust (the “Trust”) or Fund shareholders, although the Board may change the termination date. In connection with the termination of the Fund, the Fund will make a cash distribution of its net assets to then-current shareholders after making appropriate provisions for any liabilities of the Fund.
Source: Prospectus
We like maturity matched funds because they eliminate any market risk, and allow investors to purely clip a yield, absent any defaults. This fund now offers around 5% to investors:
As we approach 2024, the fund's duration will keep decreasing since the collateral pool is static:
The very short duration of the fund assets allowed the vehicle to experience a very shallow drawdown in 2022, when rates jumped. The vehicle is a very robust way to invest in a defined maturity portfolio of bonds, but granted that higher rates have made this vehicle less appealing.
Holdings
The fund contains a portfolio of corporate bonds:
What is specific about this fund and drives the entire risk/reward proposition, is the fact that it is maturity matched. That means the entire collateral will mature by the fund maturity date, thus eliminating any market risk. Market risk arises when an entity has to liquidate collateral prior to its maturity date, thus being subject to credit spread and rates fluctuations. Not here. The vehicle will get the entire cash proceeds prior to the fund maturity date.
The vast majority of the portfolio is investment grade, although there are a few fallen angels:
Fallen angels are bonds which used to be investment grade, but due to fundamental deteriorations they got downgraded to high yield. We can see a very small sliver of 1% in fallen angels here.
The majority of the portfolio comes from Financials:
This is a common occurrence in the investment grade space, with many issuers in short term or medium term bond funds being financials. Because of the shape of the yield curve with a term premium, many financial institutions usually fund themselves 5-years and in.
Performance
A term fund with matched collateral like this one, basically acts as having purchased a bond on day 1 and running the yield to maturity:
The fund was issued in 2014, and ever since, we see a nice accrual up every year, with a limited negative performance in 2022. The reason for the limited downside last year was the fund's very short duration profile. If a bond matures in 2024, then the price will pull to par irrespective of rates. Ultimately, a bond investor gets a full principal cash repayment upon maturity date, and prevailing rates will have less and less of an impact as the maturity date closes in.
We do not think the upcoming / current recession will produce high default rates for investment grade companies, hence we do not believe this fund will be fundamentally affected by its collateral going into bankruptcy before the maturity date. What will happen is we will have a nice 5% yield coming in until the fund maturity. Given where short term rates have gone though, the appeal for these type of funds is fading.
A longer term total return graph for this fund paints a nice picture of what the instrument does:
We can see a nice upward sloping total return line here, with the exception of the Covid crisis period. Spreads blew up during that time, hence the negative blip on the graph from Covid. As mentioned above, if the collateral pool does not default, these types of maturity matched bond funds act as one large diversified bond. You kind of tend to get an annual accrual close to the collateral yield, absent significant moves in interest rates. And as one approaches the maturity date, the duration of the portfolio keeps decreasing, making the fund even less sensitive to changes in rates.
Conclusion
BSCO is an exchange traded fund. The vehicle contains a portfolio of investment grade U.S. corporate bonds that have maturity dates in 2024. The fund is a term fund, set to mature and return capital to investors in December 2024. This structure allows for the elimination of market risks via its matched collateral feature. We like this build, and it amounts to an investor buying on day 1 a diversified bond with a defined maturity date. Absent violent rate moves, the fund will clip each year its yield. We saw this with BSCO - the fund has exhibited good yearly total returns, with a very modest -4% drawdown in 2022, driven by its very low duration profile. As the fund components approach maturity, the duration of the portfolio keeps decreasing. Although robust and yielding 5%, BSCO is now being slowly overtaken by pure Treasury funds which have increased their yields meteorically in the past year.
For further details see:
BSCO: 5% Yield For This 2024 Maturity Bond Fund