At The Money: Building a Bond Ladder with ETFs

**SPEAKER_2** (0:02)
Bloomberg Audio Studios, podcasts, radio, news.

**Barry Ritholtz** (0:25)
Investors who are looking for yield, especially in an uncertain rate environment, used to need millions of dollars to build out a bond ladder in a separately managed account. It wasn't easy, there were issues of credit quality, duration and risk. It made it kind of complex to do. But today, you can create a simple ladder using inexpensive ETFs. I'm Barry Ritholtz, and on today's edition of At the Money, we're going to explain how and when to build your own bond ladder.
To help us unpack all of this and what it means for your portfolio, let's bring in Steven Laipply. He's Managing Director at BlackRock and Global Co-Head of iShares Fixed Income ETFs. Previously, he was Head of iShares Fixed Income Strategy. He helps to oversee more than a trillion dollars in bond ETFs.
So Steve, let's start with the basics. What's the problem that a bond ladder is supposed to solve for investors?

**Steve Laipply** (1:28)
And so I think, Barry, this gets to a very popular longstanding practice that advisors and investors have used for years, which is this idea of, I'm not going to be able to really predict the evolution in interest rates. And so what I'm really interested in is cash flows. I'm interested in trying to line up some certainty with income. And I don't really want to take a lot of interest rate risks. So a comfortable thing is to create a ladder, which means you buy some amount of bond exposure in every year, going out to say five years. And if you're worried that interest rates are rising, you could always just not reinvest and let that ladder roll down, get your par value back at maturity. And then you could take that cash and go elsewhere. And so that's always been a comfortable thing, this idea that I'm in control.
If rates rise, I don't have to worry about a perpetual loss from having an open-ended exposure. I can just let the bonds roll down to mature and I'm done. That's sort of the idea. Now, in practice, many advisors and investors simply roll over and over again and just keep putting bonds into that last rung. However, it's just this idea that they have control. And I think that is a very attractive thing. So if you contrast that, for example, with a mutual fund or an SMA or an ETF, that may be more of a perpetual open-ended exposure. And then there is a sense that, well, maybe I'm less in control of managing that. So the attractiveness of ladders, cash flow, you have some certainty and control over how it evolves and plays out.
And that's why they're so popular.

**Barry Ritholtz** (3:14)
So let's delve into that a little bit. And for people who are not familiar with the ladder, let's say we're building a seven-year ladder. We're going to have different duration holdings for each of those seven years because we have no idea what rates will be in year three and year six and however far out you want to go. And so if you're doing a ten-year bond ladder, well, you're only taking a risk with one-tenth of that portfolio each year. And when it comes up, you get to decide, do you want to just roll it over to more of the same? Do you want to adjust your credit risk, your duration, even where you're investing? So you're always locking something in. If rates go up, you get to reinvest higher. If rates go down, well, the rest of your portfolio is now worth a little more, but you're going to get a lower yield.
Tell us about the products that exist so that you could either do this in, let's call it, seven separate holdings or just one holding with the latter built in.

**Steve Laipply** (4:15)
Yeah. And this is what's fascinating. There are a couple of things to unpack here. So, investors can ladder by going out and buying individual bonds, and that's what they've done for many, many years. The downside of that is that depending on the amount you have to work with, you might end up being fairly concentrated if you start out with a smaller amount of proceeds. Because as you know, bond face value is $1,000, and so you may not be able to build out as many holdings per year as you'd like to be diversified. But the advantage of that is, okay, I know each individual bond and I can watch it mature, etc.
Another approach would be something that we pioneered back in 2010 which is what we call an I-bond, which is meant to be sort of like an individual bond exposure that matures in a given year, but it can hold hundreds of bonds within that year.