Just curious if any of the pros (or laypeople) have any opinions on the pros and cons of building a bond ladder out of defined-maturity bond funds (be they ETFs or traditional mutual funds)?
At least on the surface it sure seems attractive. But what are the gotchas? (There always has to be gotchas :).
Some Advantages to the target maturity bond funds: liquidity, diversification, institutional-spreads (when management buys the securities to build the portfolio)
Some Disadvantages: ongoing expense ratios, possibly ill-timed cap-gains distributions if others are selling off and you aren't.
Odd quirk which isn't obvious when comparing holding a single bond to maturity versus holding a target-maturity bond fund to that same maturity: unpredictable cash-flows. While the target-maturity bond fund may have a specific maturity date, the individual securities in it may be changing over time as management buys or sells more securities to keep the thing going, and they may be buying bonds at premiums (which gives higher coupon payments but a "loss" at maturity) or at discounts (which gives lower coupon payments but a a "bump" at the end). When you buy a single individual bond and hold it to maturity, assuming no defaults, you know right at that time what the payment stream will look like all the way out.
This last point may have an impact for folks living off a portfolio and needing predictable cash streams along the way.
It also means that two target maturity funds with different portfolios but identical maturity dates may in fact have different durations.
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