Karen Veraa, Head of iShares US Fixed Income Strategy at BlackRock, shares insights on navigating the unpredictable bond market. She discusses the benefits of building a bond ladder, which helps secure income and mitigate interest rate risks. The conversation highlights how to use ETFs for diversification and professional management in bond investing. Veraa also explores aligning bond ladders with retirement plans and offers strategies for constructing them using various asset classes to optimize returns.
Building a bond ladder allows investors to manage interest rate risk while securing a predictable income stream through staggered maturities.
Using ETFs for bond ladders enhances diversification and liquidity, making it easier for investors to meet specific income needs efficiently.
Deep dives
The Benefits of a Bond Ladder
A bond ladder is a strategic investment approach that helps investors manage interest rate risk by spreading investments across various maturities. By creating a ladder, investors can enjoy a predictable income stream, as bonds mature each year, allowing the capital to be reinvested. This method reduces the need to time the market and mitigates the risks associated with fluctuating interest rates, as one can always choose to reinvest in the next rung of the ladder. This technique is especially useful for those with specific financial goals or liabilities, as it provides stability and flexibility in managing cash flow.
Selecting the Right Instruments for Bond Ladders
Investors can choose from various instruments when building a bond ladder, including U.S. Treasury bonds, municipal bonds, and corporate bonds. The popularity of using exchange-traded funds (ETFs) for constructing bond ladders has increased due to their lower costs, greater diversification, and liquidity compared to traditional individually owned bond portfolios. ETFs offer access to a broad spectrum of bonds across different sectors while simplifying management and allowing easy entry and exit from positions. This flexibility enables investors to tailor their bond ladders to meet specific income needs and risk tolerances.
Adapting to Market Conditions with Bond Ladders
Building a bond ladder allows investors to adapt to changing market conditions, such as rising or falling interest rates. For instance, if rates are expected to increase, investors can overweight shorter maturities to lock in higher yields while gradually adjusting their portfolios as bonds mature. Conversely, in an environment where rates are declining, the locked-in income from established bonds becomes more valuable, although reinvestment may occur at lower rates. Overall, a bond ladder provides a more predictable investment result over time, enabling investors to respond strategically to economic fluctuations.
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How can investors seeking income plan for a future where bond yields are unknown? One solution is building a ladder of bonds that mature in different years to both lock in higher rates now (in case yields drop), and reinvest later (if rates rise). For more on the subject, Barry Ritholtz, speaks with Karen Veraa, Head of iShares US Fixed Income Strategy at BlackRock.
Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work.