Higher interest rates and stubborn inflation against the backdrop of a negative return for bonds last year has refocused attention on bond-laddering strategies that are constructed to essentially lock down a predictable income stream.

The trend plays right into the hands of leading ETF issuers BlackRock and Invesco, both of which have target-maturity bond ETFs specifically designed for laddering.

From an asset-allocation perspective, BlackRock’s iBond ETFs and Invesco’s BulletShares ETFs make simple work of building a multiyear portfolio of bonds that mature at regular intervals.

Target-Maturity ETFs

While the target-maturity bond ETFs are low-margin products for the issuers, the firms exchange-traded funds have been among the leading sources of inflows over the past few years. The only realistic alternative to target-maturity bond ETFs for bond laddering is going up against institutional traders to buy individual bonds for clients.

“One of our first advisor clients we spoke with said the BulletShares saved him at least an hour every workday,” said Jason Bloom, head of Fixed Income and Alternative ETF Strategy at Invesco.

In the most basic sense, a target-maturity bond ETF acts like an individual bond by offering a preset yield if held to maturity.

BlackRock and Invesco offer lines of ETFs maturing annually up to 10 years across multiple bond categories, including investment-grade corporate, high-yield, municipal, U.S. Treasury and Treasury Inflation Protected Securities, or TIPS.

Invesco’s BulletShares line of funds has a history dating back 14 years. It was created by Guggenheim Investments before Guggenheim’s ETF business was acquired by Invesco in 2017.

BlackRock entered the business in 2010 with its iBond ETFs.

“They are designed to mature like a bond, trade like a stock, and are diversified like a fund,” said Karen Veraa, head of U.S. iShares Fixed Income Strategy at BlackRock.

“This environment is better for laddering because yields are higher,” she added. “With a lot of bond market volatility, you don’t have to predict rates or express a view on the yield curve.”

Record Inflows

Predictable income has long been a strong selling point behind bond laddering, which financial advisors have relied on for conservative clients or anyone ready to lock in yields over a period of years.

Both BlackRock and Invesco offer tutorials on allocating assets across the target-maturity ETFs to construct laddering strategies.

The BulletShares investment-grade corporate roster of ETFs, for example, offers yields hovering at around 6% annually through 2032, which can be an easy solution for a lot of financial advisors.

“We use ladders across the board for our clients,” said Sam Huszczo, founder of SGH Wealth Management.

Huszczo said target-maturity bond ETFs are ideal for clients with less than $5 million who don’t want to deal with the duration or redemption risk of investing in a traditional bond mutual fund.

Huszczo often builds ladders for clients using a mix of iBonds and BulletShares. “I cherry-pick the years that have the most efficient yields,” he said. “My overall goal is to take where I see the most efficient yields and target the overall duration.”

Building a Ladder

The ETFs are designed to be held to maturity, at which time they liquidate and introduce the opportunity to buy another ETF and extend the ladder. But professionals like Huszczo will sometimes divert from the plan if things get out of whack as they did a few years ago.

“In 2021, we sold out of our target dates to bring duration down to almost nothing,” he said. “The concept of holding to maturity is just a nice safety net; It’s great for decision making because I know my cap if I hold to maturity and now I have a maturity in mind that I can base all my decisions on.”

The Inflation Factor

But while bond laddering can offer clients a predictable income stream over multiple years, it’s not all free upside.

While the current cycle of higher rates increases the appeal of bond laddering, investors can be overly fixated on locking in nominal yields while ignoring the potential impact of inflation.

The solution, some advisors believe, is laddering with target-maturity ETFs linked to TIPS, which BlackRock introduced earlier this year.

With target-maturity TIPS ETFs, investors can lock in yields of about 2.5 percentage points above the rate of inflation.