ETF Understanding capital gains: How ETFs can help minimize taxes
Swapping mutual funds for tax-efficient ETFs can reduce capital gains taxes and help you keep more of what you earn.
This investment strategy looks to buy a portfolio of bonds with sequential maturity dates.
A bond ladder may reduce interest rate risk while giving an investor flexibility and predictable income.
Fixed income ETFs invest in hundreds of individual bonds helping investors save time and effort and avoid trading costs.
The bond market has experienced some instability lately, and that may be introducing unwanted volatility to portfolios. Investors generally don’t like uncertainty, and that includes bond investors. While the Federal Reserve may have settled on a policy of monetary easing, and inflation seems to have come under control, other factors have riled the markets. Fixed-income investors want stability among other benefits. So, it’s no surprise we’ve seen renewed interest in defined maturity ETFs and how they can be used to build efficient bond ladders.
A bond ladder is an investment strategy that involves buying a portfolio of bonds with sequential maturity dates. When a bond matures, the proceeds can be put toward a specific expense, such as college tuition or a tax bill. Or they can be reinvested in a new bond with a longer maturity.
By maintaining a regular but staggered cadence this strategy can help manage interest rate risk. Money isn’t all in bonds that mature at the same time, so an investor carries less risk of a price drop should they have to sell early. Laddering can help an investor balance between stability and flexibility while generating income.
A bond ladder creates a sequence of bonds that matures at regular intervals (every one, three, five, or seven years, for example).
Suppose you have $50,000 to invest. You might buy five bonds worth $10,000 each that mature every year for the next five years. After the first year, the money from the first bond can be reinvested in a new five-year bond. After the second year, the money from the second bond can be reinvested in another five-year bond. The process continues, year after year, maintaining the ladder.
A bond ladder that holds bonds to maturity not only may reduce interest rate risk, but it can also give an investor flexibility and predictable income. Most traditional fixed income mutual funds and ETFs typically have a perpetual duration target. That means bonds in that portfolio are continuously bought and sold to keep the average duration the same. It’s a way of managing risk.
A bond ladder, however, can be customized to target a specific maturity date and interest rate sensitivity (or duration profile). This flexibility may prove useful in a volatile interest rate environment. When interest rates rise, investors can reinvest any proceeds from maturing bonds into new bonds with higher rates. If rates fall, investors can choose to reinvest less of the maturity proceeds into new bonds with lower rates. Investors in a falling-rate environment may still benefit from existing bonds that were previously purchased at higher rates. Either way, bonds in a bond ladder can mature and provide income at regular intervals.
BulletShares fixed income ETFs offer the precision of bonds with the advantages of ETFs. Our suite lets investors build customized portfolios tailored to specific maturity profiles, risk preferences, and investment goals.
BulletShares ETFs invest in hundreds of individual bonds to help investors avoid the trading costs of building bond ladders, not to mention the time and effort.
BulletShares are defined maturity ETFs with termination dates like individual bonds but also the advantages of diversification1, liquidity2, and transparency3.
Try our BulletShares ETF Bond Ladder Tool to customize a bond ladder with specific investment amounts, bond asset classes, and maturity ranges.
Diversification does not guarantee a profit or eliminate the risk of loss.
Shares are not individually redeemable and owners of the Shares may acquire those Shares from the Fund and tender those Shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 10,000, 20,000, 25,000, 50,000, 80,000, 100,000 or 150,000 Shares.
ETFs disclose their full portfolio holdings daily.
Swapping mutual funds for tax-efficient ETFs can reduce capital gains taxes and help you keep more of what you earn.
The fair market of an ETF may be gauged by its net asset value (NAV), which is based on its underlying assets, leading to premiums and discounts.
Invesco's ETFs and ETPs give investors access to digital assets, including cryptocurrencies like bitcoin and blockchains like Ethereum.
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BulletShares® ETFs
The funds are non-diversified and may experience greater volatility than a more diversified investment.
Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa.
During the final year of the funds’ operations, as the bonds mature and the portfolio transitions to cash and cash equivalents, the funds’ yield will generally tend to move toward the yield of cash and cash equivalents and thus may be lower than the yields of the bonds previously held by the funds and/or bonds in the market.
If interest rates fall, it is possible that issuers of callable securities will call or prepay their securities before maturity, causing the fund to reinvest proceeds in securities bearing lower interest rates and reducing the fund’s income and distributions.
An issuer may be unable or unwilling to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Income generated from the funds is based primarily on prevailing interest rates, which can vary widely over the short- and long-term. If interest rates drop, the funds’ income may drop as well. During periods of rising interest rates, an issuer may exercise its right to pay principal on an obligation later than expected, resulting in a decrease in the value of the obligation and in a decline in the funds’ income.
An issuer’s ability to prepay principal prior to maturity can limit the funds’ potential gains. Prepayments may require the funds to replace the loan or debt security with a lower yielding security, adversely affecting the funds’ yield.
The funds currently intend to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the funds’ investments. As such, investments in the funds may be less tax efficient than investments in ETFs that create and redeem in-kind.
Unlike a direct investment in bonds, the funds’ income distributions will vary over time and the breakdown of returns between fund distributions and liquidation proceeds are not predictable at the time of investment. For example, at times the funds may make distributions at a greater (or lesser) rate than the coupon payments received, which will result in the funds returning a lesser (or greater) amount on liquidation than would otherwise be the case. The rate of fund distribution payments may affect the tax characterization of returns, and the amount received as liquidation proceeds upon fund termination may result in a gain or loss for tax purposes.
During periods of reduced market liquidity or in the absence of readily available market quotations for the holdings of the fund, the ability of the fund to value its holdings becomes more difficult and the judgment of the sub-adviser may play a greater role in the valuation of the fund’s holdings due to reduced availability of reliable objective pricing data.
The funds’ use of a representative sampling approach will result in its holding a smaller number of securities than are in the underlying Index, and may be subject to greater volatility.
BulletShares® High Yield ETFs
The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
BulletShares® Municipal ETFs
Municipal securities are subject to the risk that legislative or economic conditions could affect an issuer’s ability to make payments of principal and/ or interest.
This information is intended for US residents.
Invesco does not offer tax advice. Please consult your tax adviser for information regarding your own personal tax situation.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. The Fund’s return may not match the return of the Underlying Index. The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risk associated with an investment in the Fund.
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