U.S. Markets closed

Mitigate Rate Risk with Target-Maturity Bond ETFs


Investors can use target maturity bond exchange traded funds in a bond laddered strategy to help circumvent rate risk in fixed-income portfolios.

Bert Whitehead, founder of Cambridge Connection Inc. and Alliance of Cambridge Advisors Inc., argues that holding a portfolio of bonds with set maturities at regular intervals over a 10- to 15-year period is the best way to provide clients with a steady and stable income stream in retirement, reports Jeff Benjamin for InvestmentNews.

With interest rates set to rise as the Fed winds down its bond purchasing program and looks to hike rates to rein in inflation, a bond laddering will help a fixed-income portfolio. [Target Date Bond ETFs Reduce Rate Risk]

“A rising-rate environment is when bond ladders are designed to shine,” J. Brent Burns, president of Asset Dedication, said in the article. “When rates are flat or rising you have control over how far out on the yield curve you want to go, but you do need to be comfortable knowing that rates could rise.”

Carolyn McClanahan, director of financial planning at Life Planning Partners Inc. points to investment-grade municipal and corporate bonds as good investments for laddered strategies.

“For us, it’s all about the yield curve, and right now most of what we’re buying for ladders is between seven and 10 years [maturity],” McClanahan said in the article. “When I started doing this back in 2005, when rates were more favorable, we were grateful we went out so far [on the yield curve] with our ladders, but we’re not going out as far now because rates are still low.”

ETF investors can implement their own bond ladder strategy with defined-maturity bond funds. These types of ETFs typically buy bonds that mature in the year the fund will terminate, ensuring that investors can collect the bonds face value at maturity, along with a steady income payout along the way. Investors are meant to buy-and-hold these types of investments until they mature. 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. [Target Date ETFs for Retirement]

Guggenheim Investments and BlackRock’s iShares offering a range of laddered corporate debt.

Guggenheim’s suite of BulletShares bond ETFs include target maturity dates as far out as 2022 on corporate debt and 2020 on junk debt. The Guggenheim BulletShares 2022 Corporate Bond ETF (BSCM) has a 3.31% 30-day SEC yield and the Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK) has a 4.66% 30-day SEC yield.

The iShares line includes muni and corporate bonds that mature up to the iShares 2019 AMT-Free Muni Term ETF (MUAH) , iSharesBond Mar 2023 Corporate Term ETF (IBDD) and  iSharesBond Mar 2023 Grade ex-Financials Term ETF (IBCE) . MUAH has a 1.04% 30-day SEC yield, IBDD has a 2.50% 30-day SEC yield and IBCE has a 3.21% 30-day SEC yield.

For more information on the bond market, visit our bond ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.