Bond ETF at maturity

Your MBB example appears to keep rolling over to another uniform bunch of bonds due a few months out; not sure how. But there is an etf PLW that replicates a tbill ladder, although thru an index. I always thought laddering was a ridiculous amount of upkeep for individuals and why not let a managed product do it, but maybe it can't work with something you can sell at any time.

I hear a lot of etfs are struggling and subject to being shut down due to not covering their expenses. I would guess some of these are bond etfs, because their trading seems so darn light - you may be lucky to see a price-setting trade on any given day. For these I am told you will see a surprise return of your money with no brokerage fee.

It's not so much the effort but individual commissions that can add up to more than the expenses of an ETF. Starting the ladder takes a number of bonds, but keeping it up is trivial, what upkeep? Joe

No it is not. The fund does not hold any corporate bonds, it holds MBS securities. With the exception of a short term holding, all the holdings are agency MBS.

"The iShares Lehman MBS Bond Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the investment grade agency mortgage-backed securities sector of the United States as defined by the Lehman Brothers U.S. MBS Index."

When a bond matures, the principal may be reinvested by the manager. Interest received must be distributed to shareholders, as well as any net capital gains due to transactions.

You're somewhat mistaken. The average duration of that fund is 4+ years. The effective maturity of the bonds in the fund is probably more than twice as long as that.

However:

What the fund holds are not the actual mortgage backed securities. See where it says "TBA" next to the names of all those securities? Those are standardized forward contracts for future delivery of mortgage-backed securities.

These TBA contracts ("To Be Announced"). This isn't a bad explanation of them:

The ETF in question holds a huge exposure to both 30yr and 15yr fixed rate mortgages via these TBAs. They very likely won't actually take delivery of those mortgages (ie. they won't hold those forward contracts to their maturity) but rather will "roll" them forward - as we get closer to the November maturity you saw there, they'll sell November TBAs and buy December ones. This way they maintain relatively constant exposure to the value of the mortgages, but don't have to take delivery of all these individual securities.

Frank, bond ETFs and mutual funds will have bonds maturing frequently, and in both the manager just reinvests the proceeds (assuming the cash isn't needed for redemptions or distributions). ETFs and mutual funds that track bond indices try to match the composition and performance of the index as closely as possible, and that goal will drive decisions about what bonds are bought and sold.

Bonds aren't necessarily held till maturity though, and there's often quite a bit of turnover because the main goal is to match the index with respect to duration (average term of the bonds) and credit quality.

The specific ETF you mentioned is unusual in that it holds what are called "TBA bonds," which are a way of trading mortgages that haven't been packaged into bonds yet. The bonds don't really mature in Nov 2008, that date has to do with the naming convention for TBA bonds. You might want to read up on the mortgage-bond market a bit if you're looking at that ETF; it isn't as straightforward as say a treasury bond index fund.

-Tad