TD Asset Management Inc. Unveils the Next Stage in the Evolution of Fixed Income ETFs

Ever since interest rates began climbing two years ago, fixed income investments like Guaranteed Investment Certificates (GICs) have been getting more than their share of attention and love. But the playing field is changing with the expectation of rate cuts later this year. While the overall outlook for fixed income is still bright, there is an opportunity for bonds to steal part of the spotlight because of their inverse relationship with interest rates. If you consider the potential for capital appreciation if rates fall, bonds could provide a very attractive total return opportunity going forward.

To take advantage of this opportunity, TD Asset Management Inc. (TDAM) recently launched a suite of Target Maturity Bond Exchange-Traded Funds (ETFs) - new fixed income investment solutions designed to act like individual bonds, with regular income and final payouts on defined maturity dates.

“These Target Maturity Bond ETFs represent the next stage in the evolution of fixed income ETFs,” said Trevor Cummings, Vice President, ETF Distribution at TDAM. “They’re different in that all the bonds in each fund mature in the same year.” This gives these ETFs all the characteristics of an individual bond, but with the diversification and liquidity of an ETF that can be bought or sold at any time, and professional management through active credit selection by TDAM's Fixed Income Investment Team.

TDAM is offering up six new Target Maturity Bond ETFs in all. Three in Canadian funds, and three based in U.S. dollars, with maturity dates in November 2025, 2026, and 2027.

When an ETF's maturity date arrives, the fund closes, and investors receive their principal just as they would with individual bonds. At that point, they can adjust their investment strategy or purchase new Target Maturity Bond ETFs if they choose.

While the new Target Maturity Bond ETFs have many of the characteristics attributed to individual bonds, they also offer some distinct advantages. For instance, it's easier and far more economical to purchase a portfolio of investment-grade corporate bonds as part of an ETF, rather than building a portfolio one bond at a time through a brokerage.

And, there are no concerns about availability. “Anytime individual bonds are worth buying they have a lot of eyeballs on them,” Cummings observed. “So, if you find one that looks attractive, it might sell out. It's sort of an “act fast or not at all” kind of market. And it’s never a good thing to rush an investment decision. These ETFs will always be available.”

Target Maturity Bond ETFs also provide advantages over GICs, despite their resurgence in popularity over the last two years. While GICs are secure investments that help protect against loss of principal and provide interest income, there is an opportunity cost of locking in funds at interest rates that don’t compete with potentially higher returns from other investments. “Many markets have seen double digit increases over the last six months,” Cummings said. “If you were a GIC investor, you were a bystander. You didn’t have liquidity to move your money from GICs to equities.” Target Maturity Bond ETFs on the other hand, can be purchased and sold at any time. In addition, they are generally more tax advantageous than GICs as some of the returns may be classified as capital gains.

TDAM’s new Target Maturity Bond ETFs may be well suited for people who have short-term needs. If an investor knows they have a financial goal two or three years from now, then purchasing the ETFs maturing in 2026 and 2027 could be a good fit.

These funds are also well suited for building a laddered portfolio. This involves holding bonds with different maturity dates to create a steady stream of income and reinvestment opportunities based on an investor’s goals.

While TDAM is not the first to market with a Target Maturity ETF, they believe they have built a better mouse trap. “We're not following an index. We're doing the picking and choosing here,” Cummings said. “While bond rating agencies like Standard & Poor’s, Moody's, and Fitch typically research and determine the credit worthiness of each corporation that issues a bond, we do our own research to add an additional layer of evaluation. We think that's going to add additional return potential to these ETFs versus our competitors.”

Investors can leverage TDAM’s expertise at a very reasonable management fee of 0.20%. Competitor products are similarly priced but most are not actively managed. So, in essence, investors can get the portfolio management expertise of TDAM for no additional fee.

If the recent growth of TDAM’s assets under management is any indication, the new TD Target Maturity Bond ETFs should be an enormous hit. “TDAM is one of the largest bond investors in the country,” Cummings said. “If we look at ETF assets, we were at about $1 billion CAD in ETF assets four years ago. Today we're approaching $15 billion CAD. We've accelerated our growth quite dramatically and we have incredible momentum on our side. Investors, along with the industry at large, are starting to recognize what we're doing. It's an exciting time to work at TDAM.”

TD Target Maturity Bond ETFs can be purchased through your broker or online platform. For more information on TD ETFs, visit td.com/etfs.

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