As the U.S. braces for a rising interest rate environment, exchange traded fund (ETF) investors may adopt a bond ladder strategy to hedge against the risks through maturity- or target-date ETF options.
With the Fed intent on hiking rates ahead, investors can implement a bond laddering strategy through defined-maturity bond funds to hedge their fixed-income positions.
Related: ETFs 101: What is a Bond ETF?
These defined-maturity bond funds typically buy bonds that mature in the year the ETF will terminate, ensuring that investors can collect the bonds’ face value at maturity, along with a steady income stream along the way. As such, investors are meant to buy-and-hold these securities until maturity. In contrast, a regular bond ETF runs the risk of losing its original principal if interest rates go up, depending on the bond ETF’s effective duration, since the typical bond funds would buy and sell debt securities to maintain their target short-, intermediate- or long-duration strategy.