Not all investors will hold to maturity; not all notes and bonds mature at the same time within that year; and then there are the potential defaults (corporates of course). The portfolio would need to continue buying additional corporate notes/bonds, perhaps at lower rates.Consider just two investors and a single CUSIP. Investor 1 buys in now, investor 2 in a year.
We'll start off as simple as possible. Let's say the current market rate on a 3 year Treasury is 4%, and the underlying Treasury bonds, maturing in 3
years have 4% coupons. So they trade at par. Let's also say that the ETF shares are $100/share.
Investor 1 comes in an invests $10,000. That's 100 shares, buying 10 bonds at par in the underlying portfolio.
A year goes by. We'll assume that the yield at that moment on 2 year treasuries is 3.5%. Shorter term bonds typically have lower yields, or perhaps all rates dropped over that year. The reason doesn't really matter.
A two year bond with a 4% coupon and a YTM of 3.5% is priced at 100.9577. You can find that with a calculator, e.g.
Fidelity's, and you can verify it with EXCEL:
EXCEL function: YIELD(DATE(2024,1,1), DATE(2026,1,1), 4%, 100.9577, 100, 2)
Because the underlying bonds have appreciated from 100 to 100.9577, the share price has likewise appreciated from $100 to $100.9577.
Investor 2 comes in and buys 100 shares for $10,095.77. Keep in mind that the YTM at the time is 3.5%. Now each investor owns 100 shares.
At maturity, Investor 1 has received three
years worth of coupons at a rate of 4% and gets back the original $10,000 investment when the bonds mature and the fund is liquidated. That's your basic 4% yield. The fact that Investor 2 bought additional shares at a higher price (lower yield) had no effect.
At maturity, Investor 2 has received two
years worth of coupons at a rate of 4%, but gets back $95.77 less than the original investment. That's because the investor bought the bonds at a premium.
The YTM that Investor 2 received was 3.5% - just what the market rate on two year bonds was when the investment was made. See the EXCEL expression above. In short, having to buy or sell bonds shouldn't affect the fund's behavior. That's unlike "normal" Treasury bond funds where trading can alter the portfolio's average maturity. (In corporate bond funds, trading can also affect credit quality and risk.)
The fact that the bonds mature over a period of a year can somewhat reduce yield. In that last year, as bonds mature their proceeds are held as cash (think 3 mo Treasuries) which should yield somewhat less than 12 mo Treasuries. Or as the prospectus puts it:
Declining Yield Risk. During the six months prior to the Fund’s planned termination date, the Fund’s yield will generally tend to move toward prevailing money market rates and may be lower than the yields of the bonds previously held by the Fund and lower than prevailing yields for bonds in the market.
