5 Tools To Manage Interest Rate Risk

December 16, 2015

4. The Bond Ladder-er

Many fixed-income investors like to own actual individual bonds rather than bond funds. They do so to have certainty about their time horizon and the yields coming from their investment.

In the fund space, these types of investors tend to like bond laddering, which, thanks to iShares and Guggenheim, today is easily achievable via ETFs. Both firms have extensive lineups of single-bondlike funds that allow investors to build bond ladders and manage their risk.

These types of ETFs, such as the Guggenheim BulletShares 2015 Corporate Bond (BSCF | B-51) and its family of target-date funds, or the iShares iBonds Mar 2016 Corporate ex-Financials (IBCB | B-48), are popular here because they have a finite maturity date.

“Investors are drawn to bond ladders in the context of a rising-rate environment because when you buy a bond, you buy it at a yield,” Tucker said. “You know your cash flow regardless of what interest rates do.”

These types of ETFs are essentially a yield investment, and you get a lump-sum payment at the end, and a yield based on cash flows.

“Investors who have set-time horizons, or those who want yield and want a better idea of what they are getting down the road, like this option,” he noted. “Bonds are generally held through maturity in the fund, and return par no matter what happens with interest rates.”

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