The assignee for this patent, patent number 8655770, is
Reporters obtained the following quote from the background information supplied by the inventors: "This invention relates generally to financial services and products, and more particularly to financial systems that enable an investor to create bond laddering strategies, and other strategies that typically involve individual fixed-income securities, through a series of open-ended funds (such as exchange traded funds or mutual funds) that hold fixed-income securities.
"Bond laddering is an investment technique in which an investor purchases multiple bonds (or other types of fixed-income securities) having different maturity dates. As an example, the total investment is divided equally among several maturity dates that are spread at regular intervals over a period of time (e.g., every year for a period of ten years). In this way, the bonds associated with each particular maturity date are a 'rung' of the total investment 'ladder.' Bond laddering has a number of benefits for investors. For example, an investor may avoid capital losses (or gains) due to fluctuations in interest rates by simply holding onto the bonds until the maturity dates arrive, at which time the investor can purchase a new rung for the bond ladder. By having a series of investments that mature over regular intervals, a bond ladder provides more stability around yields and periodic liquidity for the investor.
"A bond laddering strategy may also minimize risks to the investor. For example, in an environment where interest rates are increasing, a bond ladder prevents the investor from being stuck with a low interest rate for a long time, thereby allowing the investor to benefit from the returns associated with increasing rates. On the other hand, when interest rates are decreasing, the division of the investment across several rungs of the bond ladder means that only one portion of the total bond investment (i.e., one rung of the ladder) will mature at any given time. Accordingly, if interest rates are relatively low but the investor desires to repurchase more bonds when a rung matures, only a fraction of the total portfolio will consistent of the bonds at the lower-yielding rate. As one can appreciate, by spreading out the maturity dates of the fixed-income securities over time, the ladder structure smoothes the risks associated with investing in fixed-income securities in an environment where interest rates can fluctuate.
"Investors commonly invest in different types of funds to gain exposure to various types of securities, including bonds and other fixed-income securities. A very popular type of fund is an exchange-traded fund, or ETF. Shares of an ETF are securities that represent a legal right of ownership over an underlying portfolio of securities or other assets held by the issuing fund. The assets held by an ETF may include individual stocks, bonds, cash, commodities, derivatives, or any tradable asset, including contracts based on the value of any of the foregoing. Shares of an ETF are designed to be listed on a securities exchange and traded over the exchange just like other securities. ETFs thus allow an investor to own a set or 'basket' of assets by simply purchasing shares in the individual ETF. Many existing ETFs hold a mix of assets that aim to replicate or otherwise match the characteristics of a particular published index. These ETFs allow investors to have exposure to the index by purchasing shares of the single ETF. Because of their low cost and tax advantages, ETFs have grown in popularity in recent years.
"A typical ETF resembles an index mutual fund in that an ETF generally holds a basket of securities designed to replicate the returns of a securities index and is required to permit daily redemptions at the current value of its holdings (also known as 'Net Asset Value'). But unlike mutual funds, ETF shares trade on an exchange throughout the trading day, and most investors buy and sell shares on the exchange rather than direct purchases and redemptions from the fund itself (as is the case with mutual funds). Unlike mutual funds, most transactions in ETF shares are conducted in the secondary market (i.e., on an exchange) and do not involve the movement of assets in or out of the fund. In the case of transactions in creation units that do involve the movement of assets into or out of the fund, the transactions are routinely effected by giving the redeeming shareholder their pro rata share of the fund's holdings, which does not impose trading costs or adverse tax consequences on the remaining shareholders.
"Although there are many ETFs that hold bonds, existing ETF products are perpetual in nature and therefore do not enable investors to implement strategies that rely on a maturity structure such as bond laddering. Other types of funds that may hold bonds (including open-ended funds, such as mutual funds) similarly do not enable an effective bond laddering strategy. Aside from the lack of a liquidation date, this limitation is, at least in part, due to the open-ended nature of these funds. A bond laddering strategy typically relies on the ability to buy and hold a fixed-income security until its maturity date, thus allowing an investor to lock in a specific yield for each rung of the bond ladder. But with traditional open-ended funds like ETFs, there is no liquidation date and no limitation on investors' ability to enter or leave the fund, which may require the fund to buy or sell the underlying bonds when investors buy or sell shares of the fund. The lack of a liquidation date coupled with the buying and selling of the underlying bonds while interest rates are changing may result in a net change of the yield of the underlying funds and result in uncertainty for investors around the value of their investment at liquidation. These attributes have prevented traditional open-ended funds from creating a constant yield experience for each investor in the fund. As such, existing open-ended funds are unacceptable for strategies which rely upon a liquidation date and expected yield such as bond laddering.
"Accordingly, it would be desirable to provide a fund management information system 110 that solves these problems by offering and managing open-ended funds (such as ETFs) that have properties allowing the funds to be used by investors to create and pursue other applications typically associated with individual fixed income securities such as bond laddering strategies."
In addition to obtaining background information on this patent, VerticalNews editors also obtained the inventors' summary information for this patent: "Embodiments of the invention described herein relate to a set of ETFs that possess liquidation dates (i.e., the funds de-list, liquidate and distribute proceeds to investors of record on or about a pre-specified date). However, these techniques and fund management information system 110s may be used to manage and offer other types of funds, such as mutual funds, which invest in fixed-income securities and can be purchased by investors to give the investors exposure to those fixed-income securities. Moreover, various types of bonds (e.g., corporate or municipal bonds) may be used as the underlying investment, and instead of bonds the funds may invest in different types of fixed-income securities or other investments having properties similar to fixed-income securities. Accordingly, the example embodiments described herein of an ETF that holds bonds is provided for illustration and not to limit the scope of the inventive concepts.
"In one embodiment, to enable a bond laddering investment strategy using ETFs, a fund manager offers a family of ETFs. Each ETF in the family invests in bonds that mature on or about the same maturity date, and the maturity dates of the underlying bonds associated with each ETF are spread over time, preferably evenly. For example, in 2010, a fund manager may offer ten ETFs, one for each year starting from 2011 and going until 2020. Since the underlying bonds for a particular ETF mature at approximately the same time, each ETF can be invested in as a rung of the bond ladder, and investors are free to invest in the rungs as they see fit. After all bonds in the ETF have matured, the ETF closes and liquidation proceeds are distributed out to investors.
"Because investors may enter or leave the ETFs by buying or selling shares, shares of the ETF may be created or redeemed (to accommodate the buying or selling) in a market where interest rates may be changing. A fund management information system 110 is provided to monitor and manage the end-date ETF structure. In particular, the fund management information system 110 tracks the distributions, cash flows, and NAV of each ETF over time and also provides projections of future distributions, cash flows and final end date value based upon certain assumptions. If desired, the fund management information system 110 could balance the cash flows from the underlying bond holdings with the interim monthly and final end date distribution of the ETF in order to provide a specific cash flow profile. As a consequence of the end-date structure, each investor in the ETF should (approximately) realize the yield that existed when the investor entered the fund, which enables the ETF to be used as a rung in a bond laddering investment strategy. A variety of cash flow profiles could result in similar yield profiles on a pre-tax basis. The fund management information system 110 allows for the evaluation of these cash flow profiles.
"In one embodiment, each ETF holds substantially all bonds having the same maturity date. However, the ETFs may hold bonds that expire on different but generally about the same date. Additionally, the ETFs may also hold relatively small portions of their assets in other items, such as cash or securities other than bonds with the same maturity date. These additional assets may be necessary for management of the ETFs, such as for holdings between creation or redemption transactions or for distribution payment or efficiency reasons.
"In another embodiment, each ETF may hold a range of bonds with different maturity dates. Such an ETF may represent a pre-packaged bond ladder, delivering to an investor multiple ladder 'rungs' within a single ETF. The ETF may also obtain its bond exposure either by purchasing individual fixed income securities or by buying specific ETFs that represent specific ladder rungs."
For more information, see this patent: Tucker, Matthew; Laipply, Stephen A.. Investment Funds Enabling a Bond Laddering Strategy. U.S. Patent Number 8655770, filed
Keywords for this news article include: Investment and Finance,
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