How to Build a Bond Ladder with BulletShares

02/12/2018 5:00 am EST

Focus: BONDS

Chloe Jensen

Chief Analyst, Cabot Dividend Investor

Bond ladders are a way of creating your own adjustable-rate income stream, by buying a series of bonds or bond funds with staggered maturity dates, explains income expert Chloe Lutts Jensen, editor of Cabot Dividend Investor.

Then, as each security matures, you reinvest the proceeds in a new security at the top of ladder, which becomes your new longest-dated security. If interest rates are rising, the new investments will have higher coupon rates than the investments rolling off the bottom of the ladder, and your yield will gradually rise.

For example, if you wanted to create a bond ladder today, you could buy bonds maturing in 2019, 2020 and 2021. When your 2019 bond matures, you would invest the proceeds in a 2022 bond, which will most likely be offering a higher interest rate than currently-available bonds.

While longer-term bonds yield more, shorter-duration fixed income investments carry less interest rate risk. In other words, if you expect rates to go up soon, you’ll want your longest-dated bond to still mature fairly soon (probably within five years) so you’re not stuck holding a bunch of very low-yield fixed income investments for a long time.

The most important part of creating a bond ladder that will preserve your capital and work in a rising rate environment is that you only buy individual bonds or defined maturity bond funds.

Unlike standard bond funds, bond funds with maturity dates preserve the principal guarantee you get with individual bonds, or the promise that you’ll get your original investment back when the security matures.

For most investors, Guggenheim’s BulletShares ETFs are the simplest way to construct a bond ladder. The ETFs come in both investment-grade and high-yield versions, with maturity dates from 2018 to 2027.

These four funds listed below make up our bond ladder, which is a conservative strategy for generating income. The funds pay distributions monthly, and mature at the end of the year in their name, at which point Guggenheim disburses the net asset value of the ETF back to investors. 

Guggenheim BulletShares 2018 High Yield Corporate Bond ETF (BSJI 25 – yield 4.0%)

Guggenheim BulletShares 2019 Corporate Bond ETF (BSCJ 21 – yield 1.8%)

Guggenheim BulletShares 2020 High Yield Corporate Bond ETF (BSJK 25 – yield 4.8%)

Guggenheim BulletShares 2021 Corporate Bond ETF (BSCL 21 – yield 2.3%)

If you’d like to construct your own bond ladder, you can use a mix of investment-grade and high yield funds, as we have, or pick one or the other. 

The high yield funds own junk-rated debt and yield more, of course, but are also more likely to see some of their holdings default (and to be volatile when credit conditions get dicey).

If you roll the proceeds into a longer-dated fund every time a fund matures, you’ll create a reliable income stream that can rise with interest rates over time.

The BulletShares ETFs mature on the last trading day of the year in the name of the fund, at which time Guggenheim distributes the NAV of the fund to shareholders.

You can keep your bond ladder intact by reinvesting that cash into a new longest-dated fund. This will maintain your income stream — and if rates are rising, it will grow over time.

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