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.
Related: Guggenheim Expands Its Defined-Maturity BulletShares ETF Suite
Using target-date bond funds, an investor could create a bond ladder strategy to help create 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.
Using target-date bond ETFs to create a bond ladder strategy
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.
“The predominant use of BulletShares over time has been building bond ladder,” Belden said. “So build a three-, five-, seven- or 10-year ladder, using BulletShares with each successive product, and as one matures, take the proceeds and move it to the bottom of the ladder – the latest day of maturity.”
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.