As the U.S. braces for a rising interest rate environment ahead, fixed-income investors may adopt a bond ladder strategy to hedge against the risks through maturity- or target-date exchange traded fund options.

ETF Trends publisher Tom Lydon spoke with Bill Belden, Head of Product Development & Management at Guggenheim Investments, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk about defined-maturity ETFs to help diminish a fixed-income portfolio’s exposure to interest rate risk.

“We came out with BulletShares back in 2010,” Belden said. “These defined -maturity ETFs, which represent maturities ranging from 2017 to 2026, wed the best aspect of owning an individual bond with a bond fund.”

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.

“If you think about the biggest risk that investors face in a rising rate environment, it’s interest rate risk and the value of their accounts going down,” Belden said. “We’re finding greater adoption of BulletShares ETFs to help mitigate interest rate risk.”

While financial advisors and investors have implemented this strategy through individual debt securities, crafting bond ladders with individual bonds can be time consuming and cost prohibitive. Alternatively, investors can utilize target-date bond ETFs to easily create a bond ladder strategy.

By using target-date bond funds, a fixed-income investor could create a bond ladder strategy in a portfolio with varying maturity dates. The bonds’ maturity dates are evenly spaced across several years so that the proceeds from maturing bonds may be reinvested at regular intervals.

Guggenheim BulletShares ETFs:

  • Guggenheim BulletShares 2017 High Yield Corporate Bond ETF (NYSEArca: BSJH)
  • Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (NYSEArca: BSJI)
  • Guggenheim BulletShares 2019 High Yield Corporate Bond ETF (NYSEArca: BSJJ)
  • Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (NYSEArca: BSJK)
  • Guggenheim BulletShares 2021 High Yield Corporate Bond ETF (NYSEArca: BSJL)
  • Guggenheim BulletShares 2022 High Yield Corporate Bond ETF (NYSEArca: BSJM)
  • Guggenheim BulletShares 2023 High Yield Corporate Bond ETF (NYSEArca: BSJN)
  • Guggenheim BulletShares 2024 High Yield Corporate Bond ETF (NYSEArca: BSJO)
  • Guggenheim BulletShares 2017 Corporate Bond ETF (NYSEArca: BSCH)
  • Guggenheim BulletShares 2018 Corporate Bond ETF (NYSEArca: BSCI)
  • Guggenheim BulletShares 2019 Corporate Bond ETF (NYSEArca: BSCJ)
  • Guggenheim BulletShares 2020 Corporate Bond ETF (NYSEArca: BSCK)
  • Guggenheim BulletShares 2021 Corporate Bond ETF (NYSEArca: BSCL)
  • Guggenheim BulletShares 2022 Corporate Bond ETF (NYSEArca: BSCM)
  • Guggenheim BulletShares 2023 Corporate Bond ETF (NYSEArca: BSCN)
  • Guggenheim BulletShares 2024 Corporate Bond ETF (NYSEArca: BSCO)
  • Guggenheim BulletShares 2025 Corporate Bond ETF (NYSEArca: BSCP)
  • Guggenheim BulletShares 2026 Corporate Bond ETF (NYSEArca: BSCQ)

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