BulletShares FAQ - Invesco

A. A suite of defined maturity bond ETFs that can provide cash flow, the flexibility to customize maturities and the transparency to know what you own. Each BulletShares ETF matures in the stated year of the fund and returns its net assets to shareholders.

A. BulletShares^® ETFs are designed to combine the benefits of individual bonds with the advantages of ETFs. These innovative products provide:

Monthly income distributions – Like traditional fixed income ETFs and mutual funds, BulletShares ETFs typically pay monthly income distributions.

Final distribution at maturity – At each fund’s expected termination, the net asset value (NAV) of the fund’s assets is distributed to investors.²

Liquidity³ and transparency⁴ – ETFs offer investors access to real-time pricing and intraday trading.

Broad diversification⁵ – BulletShares ETFs, when incorporated into a bond ladder, offer exposure to a wide variety of bonds for added diversification potential.

A. BulletShares ETFs can help professionals because they are:

Convenient: Typically require lower minimum investments than individual bonds

Broad Exposure: Consist of a portfolio of bonds for broad exposure⁵

Flexible: Choose from a number of maturity dates and exposure levels to tailor portfolios to your clients’ risk preferences and investment goals

Simple: Whether you’re looking to fill portfolio gaps, build bond ladders or implement other strategies, do it in less time and with more precision

A. BulletShares ETFs enable investors to build customized portfolios tailored to specific maturity investment goals. Bulletshares ETFs can be used for a variety of investment strategies, such as:

• Potential rising rate protection
• Bond laddering
• Lifestyle-driven planning

A. A laddered portfolio consists of bonds with varying terms to maturity. As bonds in a laddered portfolio mature, the proceeds can be used to cover lifestyle needs, or can be reinvested in newly issued bonds.

Prior to maturity, this approach offers potential advantages in both rising and falling interest rate environments.

• If interest rates increase, and investor can reinvest the proceeds, if any, from maturing bonds at higher interest rates.
• If interest rates decrease, an investor potentially benefits from price appreciation as the portfolio’s higher-yielding bonds increase in value.

Bond laddering offers a number of potential benefits but creating bond ladders with individual bonds can be time consuming and cost prohibitive. By contrast, BulletShares ETFs offer a cost-effective and convenient approach to portfolio laddering.

A: There are two maturity processes – one for high-yield and emerging markets and one for investment grade.

High-yield and emerging markets fund maturity process
In January of a BulletShares ETF’s final year, maturing bonds are rolled into 3-month T-bills and the fund slowly transitions to cash throughout the year. The fund terminates on the last business day of the year and the full NAV is then returned to investors with no further action on their part. For tax purposes, the termination of the fund is treated as a sale and any long- or short-term capital gain or loss are realized.

Investment-grade fund maturity process
The bonds in an investment grade portfolio are more easily traded, even as maturity approaches. This allows us to reinvest the proceeds from bonds that mature in the first six months of the year into the remainder of the portfolio (i.e., those bonds that mature in the second half of the year). This allows us to maintain corporate credit exposure, with more yield than would be offered in the T-bill market. After July 1, maturing bonds are rolled into T-bills as we transition to cash in anticipation of the year-end maturity of the ETF. The termination of the fund on the final business day of the maturity year is treated as a sale of the shares for tax purposes and any long- or short-term capital gain or loss are realized.

A: One of the distinguishing benefits of owning bonds to maturity, is that the investor has a good deal of visibility into what their total rate of return is likely to be. This is especially helpful in a rising rate environment. The design of BulletShares preserves this benefit.

But while holding bonds to maturity may insulate investors from interest rate movements, it doesn’t mean that they will not experience the volatility in NAV that you might expect in an individual bond price in the years prior to its maturity.

Much like an individual bond, the fund’s NAV moves up and down with interest rates and credit spread movements in the market:

As bonds reach their final year, and their duration shortens, their price volatility gradually declines. In this way, a BulletShares ETF becomes a low-volatility portfolio as it approaches maturity:

It’s very similar to owning an individual bond, in that while you hold that bond, it’s value may rise or fall, due to changes in interest rates or credit spreads. As you approach maturity, that volatility subsides.

A: Each BulletShares ETF currently holds anywhere from 70 to 400 bonds, depending on the size of the fund. This broad exposure should help reduce the impact of such a credit event. In addition to this diversification, the underlying index also has screens for credit quality that reduce the exposure to defaulting bonds.

Investment-grade credit quality screen
A bond must have an average credit rating of BBB- or higher to be included in a BulletShares Corporate Bond portfolio. A bond must lose its investment grade rating by all the rating agencies that cover it for it to be removed from the underlying index and the fund portfolio. If this happens, it is removed from the underlying index at month’s end and the portfolio manager will, in turn, remove it from the fund.

There hasn’t been an investment-grade default in S&P’s Global Survey since 2011. The S&P Global Corporate Default Study is an annual review of defaults and ratings changes in all of the corporate securities that S&P rates worldwide.

High-yield credit quality screen
There is an extra layer of attention given to holdings of the BulletShares High Yield Corporate Bond portfolios. If a bond issuer defaults or is downgraded below CCC- by all the agencies that rate it, then it is removed from the underlying index during the month-end rebalance.

Additionally, if the bond maintains a CCC- rating by one of the agencies that cover it, but is one of the 1% highest yielding bonds in the portfolio and is trading below $0.80 on the dollar, then we deem that to be a distressed security. It is then removed from the underlying index and the portfolio. The bond may not be reconsidered for that portfolio for at least four months.

A: When a bond is called, the proceeds are invested into 13-week T-bills until the next monthly rebalance. At that time, the bond is replaced with another new corporate issue. Bonds are typically called at a premium when rates fall and therefore should not be a major concern for shareholder.

¹ BulletShares ETF and bonds generally present less short-term risk and volatility than stocks, the bond market is volatile and investing in bonds involves interest rate risk; as interest rates rise, bond prices usually fall, and vice versa. Bonds also entail issuer and counterparty credit risk, and the risk of default. Additionally, bonds generally involve greater inflation risk than stocks. Unlike individual bonds, BulletShares ETFs have fees and expenses and most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Investors should talk with their advisors regarding their situation before investing.

² The funds do not seek a predetermined amount at maturity, and the amount an investor receives may be worth more or less than the original investment. In contrast, when an individual bond matures, an investor typically receives the bonds par (or face value).

³ Shares are not individually redeemable and owners of the shares may acquire those shares from the fund and tender those shares for redemption to the fund in creation unit aggregations only, typically consisting of 100,000 or 150,000 shares.

⁴ ETFs disclosure their portfolio holdings daily.

⁵ Diversification does not guarantee a profit or eliminate the risk of loss

⁶ Holdings subject to change. Refer to invesco.com/us for most current holdings.