WEBVTT - At The Money: Building A Bond Ladder

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<v Speaker 1>We can predict the future. Over the past decade or

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<v Speaker 1>maybe even longer, no one's accurately predicted which way rates

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<v Speaker 1>were going. Are they gonna rise, are they gonna fall?

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<v Speaker 1>Are they're gonna stay steady. This creates a challenge for

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<v Speaker 1>bond investors, who are usually looking for a predictable income

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<v Speaker 1>stream from their fixed income holdings. One solution create a

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<v Speaker 1>ladder of bonds of different maturity rates, so that regardless

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<v Speaker 1>of what occurs, you have a predictable yield series. You

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<v Speaker 1>can lock in higher yielding paper if rates fall, but

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<v Speaker 1>you also free up more capital on an annual basis

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<v Speaker 1>if rates rise. I'm Barry rid Heltson on today's edition

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<v Speaker 1>of At the Money. We're going to show you how

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<v Speaker 1>to create a bond ladder to help us unpack all

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<v Speaker 1>of this and what it means for your fixed income portfolio.

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<v Speaker 1>Let's bring in Karen Vera is head of ice Shares

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<v Speaker 1>us fixed income strategy for investing Giant Blackrock. So let's

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<v Speaker 1>start simply, what is a bond ladder.

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<v Speaker 2>A bond ladder is a simple tool for investing in

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<v Speaker 2>the bond market. You take your investing window, let's say

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<v Speaker 2>ten years, and you equally wait, every maturity across that

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<v Speaker 2>ten year period, so you've got bonds that mature in

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<v Speaker 2>one year, two year, three years, and so on. It's

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<v Speaker 2>a very popular strategy because, as you just mentioned, Barry,

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<v Speaker 2>you don't have to make bets on interest rate risk.

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<v Speaker 2>You kind of have your investing horizon and you've got

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<v Speaker 2>this more predictable stream of income as well as maturity

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<v Speaker 2>is coming do each year where you can make a

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<v Speaker 2>decision about going in the next run on the bond

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<v Speaker 2>ladder or doing something else with that money.

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<v Speaker 1>We always seem to divide bond ladders into each rung

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<v Speaker 1>is the same equity amount. What's the thinking there.

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<v Speaker 2>We do see that as being the most popular. It's

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<v Speaker 2>because you can think through that, I'm going to have

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<v Speaker 2>a certain amount of money. Let's say I've got one

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<v Speaker 2>hundred thousand dollars to invest and it's a ten year ladder.

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<v Speaker 2>I've got ten thousand coming do each year. You can

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<v Speaker 2>kind of think of it in chunks like that. We

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<v Speaker 2>do see some people who are laddering out amounts and

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<v Speaker 2>retirement accounts and they need to take those required minimum

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<v Speaker 2>distributions where they will look at the irs schedule of

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<v Speaker 2>how much they have to pull out of the account.

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<v Speaker 2>It's not quite equal, but you can even ladder out

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<v Speaker 2>those required minimum distributions. You know, it's about eight percent

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<v Speaker 2>instead of ten percent in the first year, for example,

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<v Speaker 2>and then you don't have to sell anything inside your

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<v Speaker 2>retirement account and you can just pull those out on schedule.

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<v Speaker 2>So that's another way that people weight their bond ladders

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<v Speaker 2>when they're seeking that goal of having those rmds coming

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<v Speaker 2>do every year.

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<v Speaker 1>Let's talk about what goes into bond ladders. I'm assuming

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<v Speaker 1>a mix of US Treasury bonds, munis, investment grade corporates,

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<v Speaker 1>even high yielding CDs, anything else go into the mix

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<v Speaker 1>for bond ladders.

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<v Speaker 2>I'd say the most popular tends to be the munis

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<v Speaker 2>and corporate bonds and the investment grade side. We offer

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<v Speaker 2>a suite of exchange traded funds that mature each year,

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<v Speaker 2>and they're primarily used to build bond ladders. We have

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<v Speaker 2>these in high yield as well for people who want

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<v Speaker 2>to go out and add a little bit more income

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<v Speaker 2>and credit risk of the portfolios. We also even have

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<v Speaker 2>them in the tips market. So these days you can

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<v Speaker 2>build a bond ladder using all these different asset classes.

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<v Speaker 2>I think some of the challenges with CDs is typically

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<v Speaker 2>they're limited in their term. They may only go out

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<v Speaker 2>up to five years, and sometimes the banks will have

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<v Speaker 2>restrictions or penalties if you want to sell them early

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<v Speaker 2>or try to get your money back early. So we've

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<v Speaker 2>seen people migrate away from CD ladders, doing it more

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<v Speaker 2>with bond and bondytfs to build these ladders.

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<v Speaker 1>How to investors determine what their timeline is? I think

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<v Speaker 1>that's a pretty interesting choice, and most people just seem

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<v Speaker 1>to assume it's ten years. But from what I've seen,

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<v Speaker 1>there are a variety of timelines.

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<v Speaker 2>I think people can think about it if they have

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<v Speaker 2>a liability that they're managing to or a a time

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<v Speaker 2>based goal. We see people sometimes building ladders let's say

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<v Speaker 2>three to seven years, because maybe they have a cash

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<v Speaker 2>portfolio for things the next couple of years, but then

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<v Speaker 2>they don't want to start their ladder out for a

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<v Speaker 2>few years. One to five tends to be the most

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<v Speaker 2>popular based on data that we have around assets in

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<v Speaker 2>those different account types. We rarely see people go out

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<v Speaker 2>past ten years. I do see people asking for fifteen

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<v Speaker 2>because I think with the bond ladder you can accomplish

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<v Speaker 2>most of your goals within that time horizon of having stability,

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<v Speaker 2>having income rolling it every year. We also see on

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<v Speaker 2>the corporate side, corporate issues will issue ten year bonds

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<v Speaker 2>and they might do a thirty year bond, but there's

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<v Speaker 2>not really that much paper that's actively being issued beyond

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<v Speaker 2>ten years. So what tends to happen is there's just

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<v Speaker 2>not that many new issues and it's hard to find

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<v Speaker 2>the bonds. So I think that's another reason why that

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<v Speaker 2>tenyure point tends to be the maximum for most people's ladders.

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<v Speaker 1>We never know what yields will be in the future.

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<v Speaker 1>How can an investor lock in the best yields on

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<v Speaker 1>the ration curve today and benefit over the next decade

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<v Speaker 1>with their ladders.

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<v Speaker 2>Well, we do have an inverted yield curve right now,

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<v Speaker 2>so we've seen a lot of people overweighting their ladders

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<v Speaker 2>in that one to two year bucket trying to maximize income.

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<v Speaker 2>Maybe they do might do an extra forty fifty percent

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<v Speaker 2>than what they would usually do, But I think one

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<v Speaker 2>of the nice things you can do now is try

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<v Speaker 2>to lock in the yields for the interim. We've been

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<v Speaker 2>telling people on the corporate side, you can get about

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<v Speaker 2>five percent by continuing to go out six to seven

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<v Speaker 2>percent for high yield, And so we're seeing people who

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<v Speaker 2>are doing that right now, knowing that when the FED

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<v Speaker 2>starts to cut rates, interest rates are going to come down,

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<v Speaker 2>and they want to put some of that cash to

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<v Speaker 2>work and consistently beginning four five six percent rather than

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<v Speaker 2>have it dissipate in those short term vehicles as soon

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<v Speaker 2>as interest rates go down.

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<v Speaker 1>I continue to see people who are waiting for inflation

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<v Speaker 1>to reaccelerate. They're warning that the Fed is looking at

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<v Speaker 1>this incorrectly and that we should be expecting much higher

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<v Speaker 1>yield if that were to happen. Didn't someone who just

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<v Speaker 1>set up a bond ladder lock in low rates or

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<v Speaker 1>how does the ladder work in the face of that?

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<v Speaker 2>So when I think about the ladder, it's going to

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<v Speaker 2>be a more known investment result than some other more

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<v Speaker 2>perpetual bond strategy. So you kind of know what your

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<v Speaker 2>yield's going to be over that period. You can do

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<v Speaker 2>a few things. You could use tips, so we have

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<v Speaker 2>for example, tips Term Maturity ETFs tips eebonds where you

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<v Speaker 2>can get protected for the inflation, but you also have

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<v Speaker 2>the periodic income payments kicking out the ladder that you

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<v Speaker 2>can reinvest at higher yields, which will add income over time.

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<v Speaker 2>And you also have that discrete point when something matures

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<v Speaker 2>this year, you can go and grab more income. So

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<v Speaker 2>what we see is as yields go up, you're slowly

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<v Speaker 2>walking that ladder up and recouping more of the income

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<v Speaker 2>over time.

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<v Speaker 1>What about the opposite group of prognosticators, the ones who've

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<v Speaker 1>been forecasting the recession every year for the past three years,

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<v Speaker 1>that just hasn't showed up. If there's a recession and

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<v Speaker 1>rate rates fall pretty radically, what happens then what's our

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<v Speaker 1>reinvestment risk there?

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<v Speaker 2>So if you've got your ladder locked in it today's

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<v Speaker 2>yields and yields come down, that ladder income stream is

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<v Speaker 2>worth more. So I'll actually the prices on the bonds

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<v Speaker 2>go up in that situation. But then you're right when

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<v Speaker 2>the money comes to you're going to be reinvesting at

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<v Speaker 2>lower rates, and then over time that will go down

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<v Speaker 2>a bit. If you are worried about a recession, I

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<v Speaker 2>would say go up in quality. Stick to Treasury's investment grade.

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<v Speaker 2>The higher quality, even MUNI is the higher quality asset

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<v Speaker 2>classes that you don't have to worry about as much

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<v Speaker 2>default risk and volatility if we do have a coming recession.

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<v Speaker 1>I know you're the strategist for ey Shares, which issues

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<v Speaker 1>a lot of ETFs. When I first started in the

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<v Speaker 1>nineteen nineties, bond ladders were all individually owned papers and

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<v Speaker 1>separately managed accounts. Everything was hand selected, the minims were

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<v Speaker 1>pretty high, the cost structure was pretty high. The state

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<v Speaker 1>of the art stay that way for decades. It seems

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<v Speaker 1>to have gotten a whole lot better, cheaper, faster, easier today.

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<v Speaker 1>How what is the state of the art building a

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<v Speaker 1>bond ladder using ETFs.

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<v Speaker 2>I think this is one of the innovations that has

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<v Speaker 2>really come about in the last decade. No longer do

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<v Speaker 2>you have to have a million dollars to create a

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<v Speaker 2>spoke bond ladder with an SMA manager. You can do

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<v Speaker 2>it today for very little amounts of money. And so

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<v Speaker 2>what we've seen is our EE bonds have been popular

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<v Speaker 2>inside smaller account sizes. If you've got one off account

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<v Speaker 2>over here, or even if you have a lot of money,

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<v Speaker 2>it's just a very efficient way to do that. So

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<v Speaker 2>our I bonds ETFs or term maturity ETFs, they have

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<v Speaker 2>a maturity date typically each December, and they're holding bonds

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<v Speaker 2>that mature throughout the calendar year, and then when the

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<v Speaker 2>last bond matures, the ETF will dlist from the exchange

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<v Speaker 2>and you'll have cash hitting you account just like a

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<v Speaker 2>bond maturity. And we've got them now in treasuries, tips, communis,

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<v Speaker 2>investment grade, and high yield, so five different sectors of

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<v Speaker 2>the bond market. And then we've seen people really customize

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<v Speaker 2>things for their income needs, for their tax status, and

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<v Speaker 2>they're getting exposed to hundreds of bonds in a single

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<v Speaker 2>ETF as opposed to what we see with a lot

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<v Speaker 2>of SMAs as they might be limited to maybe twenty

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<v Speaker 2>to thirty bonds at the most. So you're getting diversification

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<v Speaker 2>at a very low cost. And because they are exchange traded,

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<v Speaker 2>if you change your mind and want to sell them,

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<v Speaker 2>you can at any point where a lot of times

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<v Speaker 2>with the bond it's really easy to buy it, but

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<v Speaker 2>then maybe when you go to sell it it's hard

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<v Speaker 2>to find a buyer or there's large transaction costs associated

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<v Speaker 2>with that.

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<v Speaker 1>So I'm hearing diversification, lower costs, liquidity. You mentioned they

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<v Speaker 1>all the ETF will mature at the end of the year,

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<v Speaker 1>so you have a defined maturity. Obviously, no callable bonds

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<v Speaker 1>go into that, but it seems working with an ETF

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<v Speaker 1>gives you I'm doing a little bit of a commercial here,

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<v Speaker 1>but my firm uses a lot of ETFs. We're very

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<v Speaker 1>happy with them. You get a lot of flexibility and

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<v Speaker 1>professional management. This really seems to be much better than

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<v Speaker 1>the battle days when someone was handpicking dozens of individual bonds.

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<v Speaker 2>Yeah, we still see people who are preferring that. Like

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<v Speaker 2>let's say you have special you're in a high tech

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<v Speaker 2>state and you want a special SMA dedicated to that.

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<v Speaker 2>So we see people even using our eyebonds alongside sms

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<v Speaker 2>or alongside other strategies, or maybe they're whittling those down.

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<v Speaker 2>Like we don't tell people go out and sell your

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<v Speaker 2>bond portfolio. You're curated over decades. However, this is a

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<v Speaker 2>great strategy I think to provide some liquidity, diversification and

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<v Speaker 2>low cost access to these different parts of the bond market.

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<v Speaker 1>One of the advantages of working with various large firms

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<v Speaker 1>like yourself, I Shares, Fidelity, Schwab, whoever. You have a

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<v Speaker 1>variety of online tools to build your own bond ladder

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<v Speaker 1>tell us a little bit about what people can find

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<v Speaker 1>if they want to just do it themselves.

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<v Speaker 2>If you go to ihers dot com backslash eyebonds, you'll

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<v Speaker 2>find our landing page and there's a link to our

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<v Speaker 2>Eyebonds ladder tool. And we just find this to be

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<v Speaker 2>just like a report that you would get if you

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<v Speaker 2>went to a bond manager and asked for a bond ladder.

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<v Speaker 2>You can input your dollar amount, you can check the

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<v Speaker 2>box on which sectors of the bond market you want

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<v Speaker 2>to be invested in, and there's even a slider where

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<v Speaker 2>you can look at your maturities and right away it

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<v Speaker 2>will give you an equal weighted ladder. You can then

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<v Speaker 2>customize that ladder if you like. You can delete things

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<v Speaker 2>you don't want, and it will have some summary characteristics

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<v Speaker 2>the number of bonds, the duration, the yield, the cost,

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<v Speaker 2>and I think it's a great way to just visualize

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<v Speaker 2>those yields. Like we have people who will come in

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<v Speaker 2>and they want to know what different maturities of the

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<v Speaker 2>bond market are yielding. They can go in and look

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<v Speaker 2>in and see where the treasure curve is, the investment

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<v Speaker 2>grade curve, the highyield curve, and I think it's just

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<v Speaker 2>a great source of information to even go in and

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<v Speaker 2>see what the different parts of the market are yielding.

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<v Speaker 1>So to sum up. Investors that are looking for yield

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<v Speaker 1>but are concerned about interest rates going up, down, and

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<v Speaker 1>all over the place can solve for that problem by

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<v Speaker 1>creating a ladder of bond ETFs, spreading it out of

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<v Speaker 1>five to ten years, so their interest rate risk is reduced.

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<v Speaker 1>They're locking in rates now, and if rates go higher

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<v Speaker 1>as things mature, they can reinvest it. And if rates

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<v Speaker 1>go down, hey, well at least you locked in a

0:12:11.720 --> 0:12:16.080
<v Speaker 1>higher rate for the first half of those investments. It

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<v Speaker 1>seems to make a lot of sense, and especially if

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<v Speaker 1>you're working towards a specific liability or a specific goal

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<v Speaker 1>where you have an obligation down the road, this allows

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<v Speaker 1>you with very little risk to hit those targets.

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<v Speaker 2>That's right. We were seeing all kinds of investors using

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<v Speaker 2>them for different goals and objectives, different different terms, and

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<v Speaker 2>I think it really empowers people to do it themselves

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<v Speaker 2>and invest in the bond market.

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<v Speaker 1>Thank you, Karen, This has been really interesting. I'm Barry Riddholts.

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<v Speaker 1>You've been listening to At the Money on Bloomberg Radio.

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<v Speaker 1>Sure Verti drive