Guggenheim Investments: BulletShares A Useful Solution

August 10, 2016

[The following "ETF Industry Perspective" is sponsored by Guggenheim.]

Guggenheim launched the first BulletShares ETFs in 2010. The family has since grown to include 18 funds covering the high-yield and investment-grade corporate debt markets, with more than $7 billion in assets under management in the suite. Here William Belden discusses investor usage of the BulletShares family and the Guggenheim BulletShares ETF Bond Laddering Tool, designed to help investors construct their own bond ladders with the firm's ETFs.

Is the current market environment more suited to bond-laddering strategies?
We're seeing a resurgence in the use of laddering. One reason for the increase is that laddering can be an effective way for investors to gain fixed-income exposure during periods of interest rate uncertainty, when rising rates are more likely. We've been talking about being on the cusp of rising rates for some time, and we have yet to see it. But it really is just a matter of when it will occur. One way to help mitigate this risk is through the use of a bond ladder.

As bonds in a laddered portfolio mature, the cash distribution is typically reinvested in bonds with longer-dated maturities at current interest rates. This provides broad exposure across the yield curve, giving fixed-income investors the opportunity to address movements in interest rates, while also maintaining the ability to customize cash flows to address individual needs. The ladder also diversifies reinvestment risk across a broad range of bonds that mature at different intervals.

So there's an advantage in the diversification aspect?
Yes. For example, the ladder strategy allows the investor to invest across varying durations, maturities, issuers or credit ratings, broadening potential diversification within a fixed-income portfolio.  

But building an effective bond ladder presents challenges, which include the dramatic reduction in bond inventories we have seen in recent years as well as the time-consuming research needed to fill required specifications and costs to implement an effectively diversified strategy. BulletShares offer a cost-effective and convenient approach to bond laddering. Providing defined maturity exposure through portfolios of either investment-grade or high-yield corporate bonds, Guggenheim BulletShares ETFs enable investors to build customized fixed-income portfolios tailored to specific maturity profiles, risk preferences and investment goals. Offering maturities ranging from 2016 to 2025,1 each BulletShares ETF provides exposure to a wide variety of corporate bonds, which may help optimize portfolio performance and reduce issuer-specific risk.

Do BulletShares help address potential liquidity challenges in building a bond ladder?
I don't know if the ladder concept lends itself to a liquidity solution. But using BulletShares can help address any liquidity concerns because it employs an ETF structure. Fixed-income ETFs are as liquid as their underlying securities because ETF shares may be exchanged for a basket of the underlying bonds via the ETF creation/redemption process. The underlying securities are purchased or sold as needed to satisfy the market demand for the creation/redemption of ETF shares. So, as long as the underlying securities are liquid, so too are the ETF shares.

Another reason the ladder strategy may be finding favor with investors is the attractive return potential it offers. Research from Crestmont Research has shown that five-, seven- and 10-year bond ladders constructed over the course of the past 115-plus years have produced a positive return.

 

  Bond Ladders: Long-Term History
1900-2015 5-Year 7-Year 10-Year
Average Return 4.50% 4.60% 4.80%
Minimum Return 0.40% 0.30% 0.20%
Maximum Return 15.50% 15.70% 16.20%

Crestmont Research 2015, Copyright 2004–2016, Crestmont Research (www.CrestmontResearch.com). Table is for illustrative purposes only and does not reflect future performance of any particular fund. Analysis reflects total return, taking into account "then current" interest rates, as well as income received as interest payments each year. For the purposes of this analysis, maturing bonds and all interest are assumed reinvested in the respective ladders illustrated above. Composition of the five-, seven- and 10-year ladder scenarios illustrated represents Treasurys and Treasury-equivalent investments.

 

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