How to Build a Bond Ladder with BulletShares® ETFs
A bond ladder strategy is one of the most effective tools fixed-income investors can utilize. The strategy offers a degree of flexibility and predictable cash flow, which can help navigate uncertain interest rate environments. Guggenheim BulletShares® ETFs and the Guggenheim BulletShares® ETF Laddering Tool can help investors create bond ladder strategies to address their unique investment needs in a variety of rate environments.
Bond Ladder vs. Bond Fund
A bond ladder consists of bonds with varying terms of maturity. As bonds in a laddered portfolio mature, the cash distribution is generally reinvested in bonds with longer-dated maturities at current interest rates. Offering broad exposure to the yield curve, the strategy gives fixed income investors the opportunity to address movements in interest rates, while also maintaining the ability to customize cash flows to address individual needs.
In contrast, a traditional bond fund or ETF offers a perpetual (or constant) maturity rather than a specific maturity date, which leaves the investor exposed to both interest rate and reinvestment risk. These are both risks that can be managed within a bond ladder strategy. Unlike bond funds, bond ladders offer investors the ability to design portfolios that address their own individual cash flow needs as opposed to implementing a strategy that may not complement their goals.
How Bond Ladders Address Interest Rate Risk.
Interest rate risk is the potential for rising rates to cause the prices of bonds to fall. Just as it is impossible to determine how equity markets will perform, it isn’t any easier to determine how interest rates will move. A ladder strategy helps address some of the risks inherent in this uncertainty by holding bonds until they mature and then reinvesting proceeds in at then-current yields further out on the ladder. A bond ladder can help create a predictable stream of income.
Bond Laddering – Consistent Income Potential
Historical analysis shows that simple bond ladders using Treasuries and their equivalents, which have a high sensitivity to interest rate movements, have generated positive returns.1 Bond laddering provides investors with the ability to balance capital preservation with the desire to achieve competitive returns.
An Historical Perspective1
Bond Ladders: Long-Term History
However, creating bond ladders with individual bonds can be time consuming and cost prohibitive. In contrast, Guggenheim BulletShares® ETFs offer investors a cost-effective and convenient approach to portfolio laddering.2
Bond Laddering with BulletShares® ETFs
Guggenheim BulletShares® ETFs provide defined maturity exposure through portfolios of either investment grade or high yield corporate bonds. This enables investors to build customized fixed-income portfolios tailored to specific maturity profiles, risk preferences, and investment goals.
Offering maturities ranging from 2018 to 2027,3 each BulletShares® ETF provides exposure to a wide variety of corporate bonds, which may help optimize portfolio performance and reduce issuer-specific risk.
A BulletShares® ETF Ladder
Simplifying the Bond Laddering Process with BulletShares® ETFs
Bond laddering offers a number of potential benefits, but creating bond ladders with individual bonds can be time consuming and cost prohibitive. In contrast, BulletShares® ETFs can be used to create new or manage existing bond ladders, offering investors a cost effective and convenient approach to portfolio laddering. Guggenheim BulletShares® ETFs may efficiently fill portfolio gaps caused by matured or called bonds. Each time a bond in a client portfolio matures or is called, you can easily replace it with the appropriate Guggenheim BulletShares® ETF. And because the required initial investment for an individual bond can be $10,000 or greater, laddering with BulletShares® offers greater diversification, transparency, and generally lower costs than building a laddered portfolio with individual bonds.
(Research and Sourcing)
- Required cash flow timing/amount
- Credit profile/analysis
- Portfolios selected based on credit and maturity requirements
- Known credit profile and maturity date
||Ladders hold individual issues at varying maturities which can lead to concentrated credit risk
||BulletShares® hold a basket of individual issues, which help diversity credit risk
- Bonds trade over the counter - filling specific requirements can be time-consuming
- Historically, individual bonds are not as actively traded as equities which may reduce liquidity and create price discrepancy
- BulletShares® trade on licensed equity exchanges with a designated market maker
- Orderly markets and transparent trading and pricing
Guggenheim BulletShares® ETF Laddering Tool
Guggenheim BulletShares® suite of ETFs enable you to build customized fixed-income portfolios tailored to specific maturity profiles, risk preferences, and investment goals. Their convenient ETF structure may offer greater diversification, transparency, and generally lower costs than building a laddered portfolio with individual bonds. The Guggenheim BulletShares® ETF Laddering Tool provides a convenient way to create a laddering strategy.
1 Source: Crestmont Research. Copyright 2004–2017, Crestmont Research (www.CrestmontResearch.com). Chart is for illustrative purposes only and does not reflect future performance of any particular fund. Analysis reflects total return, taking into account “then-current” interest rates, as well as income received as interest payments each year. For the purposes of this analysis, maturing bonds and all interest are assumed reinvested in the respective ladders illustrated above. Composition of the five-year, seven-year, and 10-year ladder scenarios illustrated represents Treasuries and Treasury-equivalent investments.
2 The funds do not seek to return any predetermined amount at maturity and the amount an investor receives may be worth more or less than their original investment. In contrast, when an individual bond matures, an investor typically receives the bond's par value (or face) value.
3 The funds have designated years of maturity ranging from 2018 to 2027 and will terminate on or about December 31st of their respective maturity year. In connection with such termination, each fund will make a cash distribution to then-current shareholders of its net assets after making appropriate provisions for any liabilities of the fun d. The funds do not seek to return any predetermined amount at maturity. In the final six months of operation, as the bonds held by the fund mature, the fund’s portfolio will transition to cash and cash equivalents, including without limitation U.S. Treasury Bills and investment grade commercial paper, which may result in a lower yield than the yields of the bonds previously held by the fund and/or prevailing yields for bonds in the market. The funds will terminate on or about the date above without requiring additional approval by the Trust’s Board of Trustees (the “board”) or fund shareholders. The board may change the termination date to an earlier or later date if a majority of the board determines the change to be in the best interest of the funds.
Risk Considerations Guggenheim BulletShares ETFs may not be suitable for all investors. Investment returns and principal value will fluctuate so that when shares are redeemed, they may be worth more or less than original cost. Most investors will also incur customary brokerage commissions when buying or selling shares of an ETF. Investments in securities and derivatives, in general, are subject to market risks that may cause their prices to fluctuate over time. ETF shares may trade below their net asset value (“NAV”). The NAV of shares will fluctuate with changes in the market value of an ETF’s holdings. In addition, there can be no assurance that an active trading market for shares will develop or be maintained.
Read the fund’s prospectus and summary prospectus (if available) carefully before investing. It contains the fund’s investment objectives, risks, charges, expenses, and other information, which should be considered carefully before investing. Obtain a prospectus and summary prospectus (if available) at GuggenheimInvestments.com.
The referenced fund is distributed by Guggenheim Funds Distributors, LLC. Guggenheim Investments represents the investment management business of Guggenheim Partners, LLC (“Guggenheim”), which includes Guggenheim Funds Investment Advisors (“GFIA”), the investment advisors to the referenced fund. Guggenheim Funds Distributors, LLC is affiliated with Guggenheim and GFIA.
BulletShares®, BulletShares® USD Corporate Bond Index, and BulletShares® USD High Yield Corporate Bond Index are trademarks of Accretive Asset Management LLC and have been licensed for use by Guggenheim Investments. Accretive Asset Management, LLC is an affiliate of Guggenheim Investments.