Originally published at: Exploring the benefits of bond laddering – InvestEngine Insights
Bond investors have endured a whipsaw environment in interest rates that has introduced more unwanted volatility to portfolios. And now with continued uncertainty over the US Federal Reserve interest rate policy, inflation, and even the possibility of a recession, fixed-income investors are looking for stability.
Therefore, it’s no surprise we’ve seen interest in defined maturity ETFs and how they can be used effectively in income-generating strategies such as “bond laddering”.
Bond ladders for some income predictability
For decades, pension funds and other large institutions have constructed sophisticated portfolios to generate income streams that precisely meet their future liabilities. This typically involves investing in individual bonds that mature at different times. Each bond distributes a certain amount of income at specified times for a defined period. As each bond matures, they would either use the proceeds to meet an immediate need or reinvest them into other bonds that form part of the ladder.
How bond ladders work: a hypothetical example
Bond ladders that hold bonds to maturity may be appealing to investors looking for some income predictability in volatile interest rate environments. Ladders can be customised to target specific maturity dates, giving investors more control over the portfolio’s income streams and sensitivity to changes in interest rates.
For instance, when interest rates are rising, an investor may choose to reinvest any proceeds from bonds maturing from the ladder into new bonds with higher rates. Meanwhile, if interest rates fall, they may prefer to reinvest less of the maturity proceeds into new bonds with lower rates. That level of control can be quite useful for a big institutional investor with a dedicated team of portfolio managers.
However, not every investor has the tens of millions of pounds needed to construct an extensive portfolio of individual bonds, nor the time and expertise required to manage it. That’s where fixed maturity ETFs come in.
How BulletShares ETFs can be used instead of individual bonds
Invesco’s range of BulletShares fixed maturity ETFs can help investors build bond ladders more efficiently because they combine the potential benefits of individual bonds and ETFs. Invesco BulletShares UCITS ETFs let investors avoid the trading costs, research, and time of building bond ladders with hundreds of individual bonds.
Defined maturity ETFs like BulletShares have termination dates like individual bonds and they also combine the advantages of ETFs such as diversification, liquidity, and transparency.
Our BulletShares ETFs provide a choice of exposure to either USD or EUR investment grade corporate bonds, with maturity ranges from 2026 to 2030, and we offer a GBP-hedged share class for investors who wish to minimise currency risk.
Whatever you’re looking to accomplish with your bond portfolio, Invesco’s range of BulletShares UCITS ETFs can offer convenient, cost-effective solutions to potentially meet your income goals.
Find our range of GBP-hedged BulletShares ETFs here: Invesco | InvestEngine
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