In the fund profiles above, we discuss average effective duration and average maturity. These core measures help investors understand the risks involved with a given fixed-income investment, specifically interest rate risks.
What Is Effective Duration?
Effective duration is a measure of the sensitivity of a bond or bond portfolio’s price to changes in interest rates. It takes into account not only the time to maturity but also the impact of cash flows like coupon payments.
In other words, effective duration considers how the bond’s price would change for every 1% change in interest rates, taking into account both the bond’s periodic interest payments and the final principal payment at maturity.
Like average maturity, effective duration is expressed as a number of years. Bonds with higher effective duration are more sensitive to interest rate changes and are likely to experience larger price fluctuations compared to bonds with lower effective duration.
Average maturity, on the other hand, is a straightforward measure that represents the average time until the bonds in a portfolio or ETF mature and the principal is repaid. It does not consider the impact of cash flows or interest rate changes.
While average maturity can provide a general idea of the investment’s time horizon, it does not fully account for the potential impact of interest rate fluctuations on the bond’s price. Therefore, it may not be as reliable a measure of interest rate risk as effective duration.
What You Need to Know
Effective duration is a more sophisticated measure that reflects the sensitivity to interest rate changes, including cash flows. Meanwhile, average maturity is a simple average of bond maturities, not accounting for interest rate effects.
Investors and analysts often use both measures in combination to get a more comprehensive view of the interest rate risk associated with their bond investments.
Short-term bond funds can be a good place to invest money that you may need in the next few years. Keep in mind that these funds are not risk-free, though they are safer than investing in high-yield bonds or the stock market. Investors looking to earn yields with even less risk, might consider money-market funds.
Short-term bond funds can be a good place to invest money that you may need in the next few years. Keep in mind that these funds are not risk-free, though they are safer than investing in high-yield bonds or the stock market. Investors looking to earn yields with even less risk, might consider money-market funds.
Credit risk: Bond ETFs hold a portfolio of bonds, and the credit quality of these bonds can vary. If the ETF holds bonds with lower credit ratings, it may be exposed to higher credit risk. Defaults or downgrades of the underlying bonds can have an impact on the ETF's performance.
If you are looking for predictable value and certainty for your financial goals, then individual bonds may be a better fit. Meanwhile, if you are looking for professional management and want greater diversification for your financial goals, then bond funds may be a better fit.
When it comes to selecting bond ETFs, most investors choose diversified products with different types of bonds that mature at various times. However, investors seeking higher yield may favour corporate bonds, while investors expecting inflation to rise might turn to real return bond ETFs.
The iShares Short Treasury Bond ETF seeks to track the investment results of an index composed of U.S. Treasury bonds with remaining maturities one year or less.
We believe taxable municipal bonds have met investor expectations this year. They are either outperforming or performing in line with key high-grade U.S. fixed income sectors and are doing so with a higher quality mix. Index spreads have tightened due to demand from diverse participants, including U.S. mutual funds.
Introduction: My name is The Hon. Margery Christiansen, I am a bright, adorable, precious, inexpensive, gorgeous, comfortable, happy person who loves writing and wants to share my knowledge and understanding with you.
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