When it comes to fixed income investing, particularly at a time of historically low interest rates and unprecedented monetary policy, it's hard to beat a basic bond laddering strategy.
For income investors, even if they're grumbling about the low yields, there's nothing quite as comforting as knowing exactly what to expect from the safe part of their portfolio, since bond investments are held to maturity. The alternative that a lot of investors and advisers are still opting for involves
holding bond funds and hoping the portfolio doesn't get creamed when rates start rising.
With that in mind, Guggenheim Investments is upping the game with a new platform aimed at making bond ladder construction easier to accomplish. But there are a few wrinkles worth noting.
The platform, which launches Wednesday, is essentially phase two of Guggenheim's side-door entry into the bond ladder business, which began with
family of target-maturity BulletShare ETFs launched in 2010.
PORTFOLIOS OF BONDS
Similar to an exchange-traded fund lineup offered by BlackRock Inc., BulletShares are portfolios of individual bonds that all mature on the same date, triggering an annual liquidation that results in checks being sent to shareholders.
At the end of last year, when the $800 million 2014 BulletShares was nearing maturity, Guggenheim managing director William Belden said, “We swallow hard and give the money back.”
They give it back while hoping investors will use the money to buy another BulletShares on the long end of a bond ladder, which is where the new platform comes in.
“We know that laddering has become the predominant use of the BulletShares ETFs, and we've been working for a while to develop a better way to support the use of them in bond ladders,” Mr. Belden explained. “It's not a matter of if, but when interest rates start to bump up, so the laddering features and benefits are top of mind.”
The bond laddering platform
lets an adviser or investor to customize a portfolio using the 16 BulletShares ETFs, which include nine investment-grade ETFs maturing annually between 2016 and 2024, and seven high-yield ETFs maturing between 2016 and 2022.
For example, an equal-weighted portfolio across all 17 ETFs would produce a yield to maturity of 3.67%, with a duration of 3.66 years for the blend of 2,913 underlying bonds.
Building a ladder with just the investment-grade ETFs generates a yield of 2.44%, a duration of 4.38 years, and a portfolio of 2,034 underlying bonds.
A ladder can be customized in multiple ways, blending different years and the two different bond grades, but a seven-year ladder using just the high-yield ETFs generates a 5.41% yield, a duration of 2.78 years, and a portfolio of 879 bonds.
Before target-maturity ETFs came along, advisers had to go to the bond market to buy individual bonds for ladder rungs, and calculating total yields and portfolio duration was often more work than it was worth.
“For a lot of advisers, this will streamline the process,” said Lawrence Whistler, chief investment officer at Nottingham Advisors Asset Management.
Mr. Whistler, who was involved in the beta testing of the Guggenheim platform, said he likes it because “it doesn't get too technical, it just gives you the most important metrics to build a bond ladder.”
The catch, or downside, he confessed, is that it only works with BulletShares ETFs. But it's hard to fault Guggenheim for that.
One thing that Guggenheim could be faulted for is stacking investment grade bond ETFs up against its high-yield version, which makes it feel real easy to just step on the gas a bit for a little extra income.
UNDERSTAND THE RISKS
“When you have the ability to mix investment grade with high-yield, people might just like the higher yield and not really understand the risks,” said J. Brent Burns, president of Asset Dedication, a firm that builds customized bond portfolios.
“I think the software is nice, slick and very clean, and it will be easy for people who understand the basic concept of laddering to use,” he added. “The only thing missing is a button that says 'click here to buy.'”
But even as a proponent of bond ladders, Mr. Burns said he would never use high-yield bonds when building an income ladder for a client.
“If you place the ladder on the growth side, I guess high-yield is fine, but if you're thinking of it as your safe money, it won't be safe when things fall apart like they did in 2008,” he said. “High yield is a bond, but it's a speculative bond and it can go down like a stock.”
Mr. Belden doesn't agree that high-yield should automatically be eliminated from a bond ladder.
“The determination of whether or not high-yield bonds should be used in a ladder is specific to each client's needs,” he said. “Of course, there's a greater degree of risk associated with high-yield bonds, hence the higher yield.”
In other words, just because the technology and products to build a solid bond ladder are readily available doesn't mean you don't have to do your due diligence.
