New target-maturity bond ETFs speak to investor demand for stability amid uncertain rate outlook

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Investors’ growing appetite to lock in higher fixed-income yields for a set term has led to a flurry of new bond investment funds with defined maturity dates.
Of the 36 target-maturity bond exchange-traded funds (ETFs) currently on the Canadian market, 24 have launched this year, according to National Bank Financial Inc. (NBF).
As the name suggests, target-maturity ETFs are bond funds that hold securities that mature in a given year, providing the surety of an individual bond but with some additional advantages.
“These funds mature like a bond, have the liquidity of a stock and the diversification of a mutual fund,” says Stephen Hoffman, managing director of ETFs at RBC Global Asset Management Inc.
RBC GAM has offered target-maturity bond ETFs since 2011, but expanded its suite last year and again in April with RBC Target 2030 Canadian Government Bond ETF RGQS-T and RBC Target 2030 Canadian Corporate Bond Index ETF RQS-T, as well as a suite of U.S. corporate bond ETFs with maturities ranging from 2025 to 2030.
Guardian Capital Group Ltd. launched its suite of Canadian investment-grade corporate bond target-maturity funds in January and TD Asset Management Inc. followed with its own set of ETFs in April.
“This has been the most successful bond ETF launch in our history,” says Trevor Cummings, vice-president of ETF distribution at TD AM, which has attracted about $100-million in assets under management (AUM) across the six new funds, he says.
The TD AM target-maturity bond ETFs hold either Canadian or U.S. investment-grade corporate credit, with the latest maturing in 2027. TD AM intends to launch replacement funds as older ones mature, allowing investors to roll capital into new target maturity years, Mr. Cummings says.
While RBC GAM’s products have been around for more than a decade, they took off in 2023, doubling to $2.4-billion in AUM, according to NBF data. Target maturity ETFs, as a category, have brought in $646-million so far this year as of April 30.
Mr. Hoffman says the primary rationale for these ETFs hasn’t changed – easy access to a diversified basket of bonds that’s highly liquid, generates regular cash flow (RBC GAM’s funds offer monthly distributions), and return of capital at the end of term.
“These products were originally launched for the very same reasons we’ve been expanding the program now,” he says. “If you’re going to own individual bonds, you’re better off owning this kind of product because you’re going to get better diversification and optionality, all in a single trade.”
But higher fixed-income yields have been a boon. After interest rates spiked in 2022 and stocks and bonds tanked, cash alternative ETFs attracted billions of dollars. But that momentum is receding as expectations for interest rate cuts grow, triggering outflows of more than $1.5-billion from cash-alternative ETFs in the first four months of this year, according to NBF data.
“We’re starting to see the trend reverse,” says Tiffany Zhang, vice-president, ETF research and strategy at NBF. “Investors are stepping out of cash.”
While the lion’s share of flows have gone into equity funds this year, investors and advisors are also moving back into longer-dated bond exposures.
Susyn Wagner, senior wealth advisor and portfolio manager with the Wagner Investment Management Team at Wellington-Altus Private Wealth Inc. in Calgary, is using target-maturity ETFs as core fixed-income allocations in her client portfolios.
“There’s interest now because we have higher yields, there’s more availability of these instruments, and people don’t want to be locked into something like a [guaranteed investment certificate]. And they provide far more diversification than an investor can get with buying just a handful of regular bonds,” she says.
For example, RBC Target 2024 Canadian Government Bond ETF, currently holds nine issues, a number that will shrink further as holdings come due in the coming months. By contrast, the comparable 2028 fund holds 20 bonds. Corporate bond-based funds typically hold more.
“These do provide really good vehicles for planning purposes, as well,” Ms. Wagner says, noting she uses the target-maturity funds for clients with registered education savings plans and tax-free first-home savings accounts.
“They’re perfect for [those accounts]. You need them to be secure and you want them to be liquid because, perhaps, an actual house becomes available to you and you want to sell the holding,” she says.
Mr. Cummings says the funds can also work for clients with big-ticket items to pay for, such as a cottage or chalet that’s being completed: “These are good for matching to those liabilities.”
For advisors, the funds, which are similar to individual bonds, provide a window to revisit client objectives, he says. “Because every year there’s a maturity, that gives advisors an opportunity to check in with clients and say, ‘We have a maturity coming up in a few months. Let’s talk.’”
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