Even in a Low-Rate Environment, Bond Laddering Can Help

The current low-yield environment is certainly putting a strain on fixed income investors who are trying to squeeze out the most yield in this challenging market landscape. With more investors seeking the safety of bonds, it’s putting downward pressure on yields, but a bond laddering strategy can help.

Invesco’s website offers a primer on bond laddering for investors looking to utilize the strategy.

“Bond laddering is a simple strategy that is commonly deployed by fixed income investors,” an Invesco article said. “A laddered portfolio consists of bonds with varying terms to maturity, often with a consistent period of time between each maturity. By creating such a portfolio, an investor will have bonds maturing periodically, allowing the proceeds to be reinvested into new bonds, held as cash in the account, or invested into some other instrument.”

Invesco offers a BulletShares suite that allows fixed income investors to use the bond laddering strategy and apply them to exchange-traded funds (ETFs).

“Creating a bond ladder with BulletShares ETFs can help mitigate these potential problems,” the article noted. “The securities in the BulletShares ETFs have all been subjected to institutional-level research scrutiny. Trade execution is facilitated by designated market makers, assuring a competitive and transparent price at any given time, and all of these ETFs hold a basket of individual issues, which helps diversify credit risk.”

Additionally, investors can combine long and short duration ETFs to create their own bond laddering strategy. For long duration, investors can use the iShares 20+ Year Treasury Bond ETF (NasdaqGS: TLT).

Advantages of adding TLT to your portfolio:

  • Exposure to long-term U.S. Treasury bonds
  • Targeted access to a specific segment of the U.S. Treasury market
  • Use to customize your exposure to Treasuries

As for the fund itself, TLT seeks to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index. The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity greater than or equal to twenty years.

TLT Chart

TLT data by YCharts

For the shorter duration, investors can use the SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB), which seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index.

SPSB invests at least 80 percent of its total assets in securities designed to measure the performance of the short-termed U.S. corporate bond market. Ideally, shorter-term bond issues with maturities of three to four years are ideal to minimize duration exposure should the bull market enter a correction phase.

SPSB Chart

SPSB data by YCharts

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