Several ETF sponsor firms offer a new class of fixed income fund that only invests in selected maturities. In these bond ladder ETFs, all of the underlying investments are concentrated in a selected maturity window (e.g., 2018 investment grade corporates or 2017 municipals). This new type of bond fund offers the ability to tailor duration risk and sector exposure to match risk and return objectives.
Since bond ladder ETFs are designed to mature, you can stack them together in an arrangement that resembles a traditional, but more diversified, bond ladder (hence the term Bond Ladder ETFs). By stacking the ETFs, you own multiple highly-diversified baskets of underlying bonds. Just like equity ETFs, one of the prime advantages of fixed income ETFs is diversification.
Since the ETFs trade like equities, an investor (particularly smaller advisors, institutions and firms) do not need to deal with the headaches of individual bond trading. Trading odd lots is a treacherous and frequently unprofitable undertaking for most smaller investors.
In this steep yield curve environment, the Bond Ladder ETF structure offers a unique solution to adding diversification to the traditional bond ladder. Having precise control over sector exposure and duration risk could prove rewarding if the current fixed income dynamic looks likely to persist.