Bond investors are certainly living in interesting times with the Federal Reserve mulling over its interest rate policy, causing market volatility in both stocks and bonds.
For the latter, fixed income investors are certainly tasked with trying to maintain a certain degree of yield while inflation is running hot. At the same time, investors need to keep Fed policy in mind with the potential of rate increases eroding income over time.
According to a CNBC report, 2021 saw U.S. bonds post negative returns in a year of recovery from the onset of the pandemic in 2020, thanks to rising rates. With more rate increases expected this year, depending on how hawkish the Fed is, returns could once again turn negative.
“We are in a very precarious position with bonds right now,” said Michael McClary, chief investment officer at Valmark Financial Group in Akron, Ohio.
Bond Laddering With BulletShares
One of the strategies to help mitigate ongoing risk in the bond markets is laddering. The strategy involves investors building a portfolio of bond positions with varying maturities, like creating rungs on a ladder.
As mentioned, with rates on the move, having bonds of varying maturities can help stave off rate risk by re-investing in new bonds with higher rates. In addition, this helps prevent the concentration risk of getting stuck in one particular bond maturity.
Moreover, having bonds in an ETF wrapper also addresses the problem of liquidity in the bond markets. Invesco makes building a bond laddering strategy easy with the BulletShares ETFs that use maturity dates as soon as 2022 and as late as 2030.
“Bond laddering is a simple strategy that is commonly deployed by fixed income investors,” the Invesco website notes. “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.”
“Creating a bond ladder with BulletShares ETFs can help mitigate these potential problems,” Invesco adds. “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.”
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