Advisers who have been in the business for decades likely used to ladder individual bonds but moved away from the strategy due to the difficulty of execution, something bond ETFs have alleviated.
When it comes to bond investing, ETFs hold several potential advantages over a ladder of individual bonds. Bond ETFs may offer greater control, diversification, and improved liquidity.
By owning bonds with different maturity dates and reinvesting in long-term bonds as other bonds mature, advisors can better manage a portfolio’s income stream and risk exposure.
Allocators are now turning to ETF bond ladders to help mitigate the impact of rising rates by allowing the reinvestment of periodic bond maturities at current interest rates.
“This is probably a good time for people to start coming back to something that they’ve set aside,” Jason Bloom, head of fixed income and alternatives ETF product strategy at Invesco, said.
Bond laddering is considered a timeless strategy because an investor can buy a bond or basket of bonds and hold them to maturity, meanwhile knowing what the total return is going to be, providing a high amount of visibility that is rare to find.
How an investor prefers to ladder bonds, including which maturities are selected, high-yield versus investment-grade, as well as where an investor wants to be on the yield curve, may evolve from year to year depending on the backdrop, according to Bloom.
Many investors have already taken on bank loans and high-yield last year, so they’re now looking for other non-core exposures that can help boost the yield on their portfolios.
Investment-grade bond products, such as Invesco’s BulletShares fixed income ETFs, play to the current environment quite well, according to Bloom, as default rates are expected to remain low for the next couple of years.
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