Bond laddering with ETFs: How can it benefit you?

The bond market has experienced some instability lately, and that may be introducing unwanted volatility to portfolios. Investors generally don’t like uncertainty, and that includes bond investors. While the Federal Reserve may have settled on a policy of monetary easing, and inflation seems to have come under control, other factors have riled the markets. Fixed-income investors want stability among other benefits. So, it’s no surprise we’ve seen renewed interest in defined maturity ETFs and how they can be used to build efficient bond ladders.

What is a bond ladder?

A bond ladder is an investment strategy that involves buying a portfolio of bonds with sequential maturity dates. When a bond matures, the proceeds can be put toward a specific expense, such as college tuition or a tax bill. Or they can be reinvested in a new bond with a longer maturity.

By maintaining a regular but staggered cadence this strategy can help manage interest rate risk. Money isn’t all in bonds that mature at the same time, so an investor carries less risk of a price drop should they have to sell early. Laddering can help an investor balance between stability and flexibility while generating income.

How does a bond ladder work?

A bond ladder creates a sequence of bonds that matures at regular intervals (every one, three, five, or seven years, for example).

Suppose you have $50,000 to invest. You might buy five bonds worth $10,000 each that mature every year for the next five years. After the first year, the money from the first bond can be reinvested in a new five-year bond. After the second year, the money from the second bond can be reinvested in another five-year bond. The process continues, year after year, maintaining the ladder.

Why can a bond ladder be appealing?

A bond ladder that holds bonds to maturity not only may reduce interest rate risk, but it can also give an investor flexibility and predictable income. Most traditional fixed income mutual funds and ETFs typically have a perpetual duration target. That means bonds in that portfolio are continuously bought and sold to keep the average duration the same. It’s a way of managing risk.

A bond ladder, however, can be customized to target a specific maturity date and interest rate sensitivity (or duration profile). This flexibility may prove useful in a volatile interest rate environment. When interest rates rise, investors can reinvest any proceeds from maturing bonds into new bonds with higher rates. If rates fall, investors can choose to reinvest less of the maturity proceeds into new bonds with lower rates. Investors in a falling-rate environment may still benefit from existing bonds that were previously purchased at higher rates. Either way, bonds in a bond ladder can mature and provide income at regular intervals.

How can BulletShares ETFs build better bond ladders?

BulletShares fixed income ETFs offer the precision of bonds with the advantages of ETFs. Our suite lets investors build customized portfolios tailored to specific maturity profiles, risk preferences, and investment goals.

BulletShares ETFs invest in hundreds of individual bonds to help investors avoid the trading costs of building bond ladders, not to mention the time and effort.

BulletShares are defined maturity ETFs with termination dates like individual bonds but also the advantages of diversification¹, liquidity², and transparency³.

Try our BulletShares ETF Bond Ladder Tool to customize a bond ladder with specific investment amounts, bond asset classes, and maturity ranges.