For retirees, the construction of a bond ladder is an attractive asset management tool. By building a ladder, clients can lock in their yield and have a known income amount for each year. The challenge with individual bond ladders is the minimum amount needed to construct a diversified portfolio.
Our typical recommendation for clients is to have at least $500k to invest in a bond ladder to get proper diversification amongst issuers and maturities. With iBonds typically trading around $25 per share, you could build a bond ladder for a fraction of what an individual bond ladder would need. The downside to iBonds is that you cannot get single states and the maturity schedule currently goes out to just 2022. Therefore, if an advisor has a client who would benefit significantly from the state tax deduction, they may only receive a fraction of the income generated from ETF as tax free. Likewise, if the advisor wants to build a longer ladder, the max maturity is limited to just 5 years from today.
Innovation and Adoption Needed
In summary, we can continue to see product innovation across multiple segments of the ETF industry, but particularly in the fixed income markets. Future innovation may include additional single state bond ETFs, longer dated iBonds or a new way to slice and dice the asset class with a new surgical tool. If the ETF industry and investors continue to support an active marketplace for target maturity municipal bond ETFs, we feel these tools can take significant market share from traditional active municipal bond funds. They are a better design, just need better overall adoption. Regardless, there are currently many ways to provide tax-advantaged income to high-earners within the world of muni ETFs.
This article was written by Tyler Denholm, CFA, who is Vice President – Research & Investments at TOPS ETF Portfolios, a participant in the ETF Strategist Channel.
Important Disclosure
IBMF, IBMG, IBMH, IBMI, IBMJ, IBMK, MUB, SHM have been, may be and/or are currently held in several TOPS portfolios.
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