Duration Drift
The fact that a bond ETF maintains a roughly constant duration over time -- because the fund continuously sells maturing bonds and buys new ones to keep duration on target -- while an individual bond's duration falls by approximately one year for every year it ages. Practically, a bond ETF does not benefit from the pull-to-par appreciation an individual bond enjoys as it approaches maturity. After a sharp rate rise, an individual bond will recover to face value at maturity regardless of intervening drawdowns; a constant-duration bond ETF will not, because it never matures.
Lessons that use this term
Related terms
10Y Treasury · Altman Z-Score · Asset Sensitivity · Basel III · Bond ETF · Bretton Woods
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