Minimum Maturity Rules: The Cost of Selling Bonds before Their Time

Abstract

The authors found that the performance of traditional fixed-income index funds is negatively affected by minimum maturity rules of the indices that the funds seek to replicate. Bonds removed from indices for violating minimum maturity rules underperformed a matched sample in an extended period surrounding their removal, resulting in a 3.5 bp loss in annualized return to the ETF from which the bonds were removed. The authors demonstrate that relaxing the minimum maturity rules could result in improved performance for a popular fixed-income index ETF.