With ETFs, investors may benefit from monthly income, and advisors can actually schedule fund maturities to coincide with the client's needs-potentially at a fraction of the cost of managing portfolios of individual bonds. Analysis by the indexer Accretive Asset Management suggests that "round-trip" transaction costs (i.e., buying and then selling the asset) can be as much as 16 times higher for individual bonds compared to fixed-income ETFs. (1)

Reducing Complexity: Managing Income, Risk and Liquidity
Bond ladders can become even more complex when one takes into account both income needs and risk tolerances. With Treasury yields at historic lows, investors with a need for current income often have to diversify into higher yielding instruments. Some allocation to corporate investment-grade and high-yield corporate securities within the bond ladder may be necessary to hit the yield targets the client needs. And the choice of vehicle can affect the income stream: individual corporate bonds often pay interest semi-annually, which can be "lumpy" for clients who want to tightly manage their cash flow and need a steadier revenue stream.

In addition, gaining that investment grade and high yield exposure with individual securities can be research-intensive, requiring credit analysis. With target maturity ETFs, however, advisors can easily create ladders that offer diversified access to the entire bond market. ETFs are transparent, diversified portfolios often comprising 50-100 securities, and as such offer an attractive alternative to building portfolios one bond at a time-particularly with respect to liquidity.

ETFs are exchanged-traded, compared to the vast majority of corporate bonds (whether investment grade or high yield), which are traded in the over-the-counter market. The quality of execution with individual bonds may be inferior compared to trading target-maturity fixed income ETFs. For bonds held to maturity, there may be less impact on the investor. But if plans change and investors need to raise cash before their bonds mature, they may incur much greater cost with an individual bond compared to an ETF.

The Potential Benefits And Complexities Of Laddering
Every client is unique in investment objective, income needs, time horizon and risk tolerances. And before the development of target maturity ETFs, building customized laddered bond portfolios could be a cumbersome and expensive process. Now, however, meeting individual client needs can be much simpler. Ladders can be weighted across a ten-year horizon according to the income and risk preferences of the client-all at a fraction of the cost of individual bonds, and with a more predictable return stream than bond mutual funds.  

Taken all together, advances in fixed income ETFs have made customized ladders simple and affordable-and in a choppy uncertain market, that additional flexibility is more important than ever.


Anthony Davidow CIMA®, Guggenheim Investments, Managing Director, Portfolio Strategist, Head of ETF Knowledge Center

(1) Bond Market Liquidity-The hidden cost of investments in individual bonds; Matthew Patterson, Accretive Asset Management, 2011

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed.  

This material contains the opinions of the author but not necessarily those of Guggenheim Investments and such opinions are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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