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A Targeted Bond ETF Strategy to Navigate a Rising Rate Environment

This article was originally published on ETFTrends.com.

The bond exchange traded fund asset class has been attracting more attention as investors look for ways to adapt in a changing interest rate environment.

"You've got over 625 billion dollars now in fixed income ETFs. It's truly a disruptive innovation - the ability to uses these capabilities to build portfolios," John Hoffman, National Sales Director, RIA, Invesco, said at the Charles Schwab IMPACT 2018 conference.

For example, Hoffman pointed to Invesco's line of BulletShares bond ETFs that help investors gain defined maturity exposure and add on to a bond ladder portfolio strategy. Invesco recently extended its BulletShare lineup with the BulletShares 2028 Corporate Bond ETF (BSCS) and BulletShares 2026 High Yield Corporate Bond ETF (BSJQ) .

Invesco also expanded into the emerging markets with Invesco BulletShares 2021 USD Emerging Markets Debt ETF (BSAE) , Invesco BulletShares 2022 USD Emerging Markets Debt ETF (BSBE) , Invesco BulletShares 2023 USD Emerging Markets Debt ETF (BSCE) and Invesco BulletShares 2024 USD Emerging Markets Debt ETF (BSDE) .

"That's helping advisors, you know, really target duration and build ladders, which is really great in this backdrop," Hoffman added.

The BulletShares ETF suite tries to combine the advantages of ETF investing with the benefits of individual debt exposure, including the potential ability to match income with future cash-flow needs. The BulletShares ETFs are designed to offer income-seeking investors an easily accessible means of building or managing a laddered income stream.

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.

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.

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.

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