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New Bond ETFs Solve Age-Old Problem

A new suite of bond ETFs enables investors to more precisely target income streams.

NEW YORK (TheStreet) -- An important part of building a bond portfolio is creating a reliable income stream.

That task has been difficult to do with exchange traded funds. The reason is that an ETF, such as the

iShares 10+ Year Credit Bond Fund


, will always target the same maturity, and income will rise or fall as investors snap up or dump individual securities.


is attempting to mitigate that problem with a new suite of corporate bond funds that mature like individual bonds. For example, all of the bonds in the

Claymore BulletShares 2016 Corporate Bond ETF


mature in 2016 and the fund itself will liquidate at the end of that year.

Here's the lineup:

Claymore BulletShares 2011 Corporate Bond ETF

Claymore BulletShares 2012 Corporate Bond ETF

Claymore BulletShares 2013 Corporate Bond ETF

Claymore BulletShares 2014 Corporate Bond ETF

Claymore BulletShares 2015 Corporate Bond ETF

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Claymore BulletShares 2016 Corporate Bond ETF

Claymore BulletShares 2017 Corporate Bond ETF

The concept is a big improvement in enabling investors to get closer to locking in a yield. A couple of years from now, any buying interest in, for example, the 2017 fund would likely mean that the fund would have to buy bonds in the open market that mature in 2017. New purchases to meet that demand would be at prevailing rates, higher or lower. This could affect the yield of the fund.

Another potential snag would be if one of the bonds in the fund defaulted. On that point, it's worth noting that all of the ETFs are dominated by bonds from financial companies. The exposures range from 40% for the 2016 to 56% for the 2015 fund. Though many of the banks in the fund were "too big to fail," that doesn't future impairments won't take place. Still, financial companies issue the most bonds, so many fixed-income investors are in the same boat.

Along the same lines,


issued a similar suite of bond ETFs that targets the muni market.

Here's that lineup:

iShares 2012 S&P AMT Free Municipal Series

iShares 2013 S&P AMT Free Municipal Series

iShares 2014 S&P AMT Free Municipal Series

iShares 2015 S&P AMT Free Municipal Series

iShares 2016 S&P AMT Free Municipal Series

iShares 2017 S&P AMT Free Municipal Series

The risks boil down to what happens with the states that are in the most trouble -- budget deficits, pension shortfalls, big drops in tax revenue, or any combination of the three.

All but one of the ETFs is heaviest in California, which is very bad off. Most of the funds have large positions in New York and Arizona, which also are troubled. For example, my home state of Arizona recently had to pass a new sales tax to prevent layoffs from many state departments including teachers.

There is divergent sentiment on the fate of the states and, by extension, their bonds. Investors interested in this category need to do research and decide for themselves. Anyone believing that states aren't in real trouble may do quite will with the funds. For what it's worth, I'm avoiding munis for our firm's clients.


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At the time of publication, Roger Nusbaum had no positions in the securites mentioned.

Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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