Building A Bond Ladder With ETFs

Investors can access the benefits of short and long duration bonds by building a bond ladder with ETFs.

Reviewed by: Jessica Ferringer
Edited by: Jessica Ferringer

When it comes to building a portfolio of fixed income ETFs, duration is one of the factors that is most often considered.

Some investors prefer to stay relatively anchored to the duration of the broad fixed income market. The iShares Core U.S. Aggregate Bond ETF (AGG) currently has an effective duration of 6.64 years.

But in an environment with historically low interest rates and inflation expectations increasing, many have chosen to opt for shorter-duration ETFs. ETFs within the ultrashort and short-term categories have seen significant inflows this year.


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Short-term bonds have less interest rate risk in exchange for lower yields, a trade-off that investors seem willing to accept right now. The JPMorgan Ultra-Short Income ETF (JPST) and the Vanguard Ultra-Short Bond ETF (VUSB) have recently notched their highest daily inflows for the year.

Investors Go Long

On the other end of the spectrum are long-duration bonds. The iShares 20+ Year Treasury Bond ETF (TLT) is the quintessential example of a long-duration ETF. And while this fund has seen net outflows for the year, the fund has been in net inflow territory every day since Nov. 24, as worries about the Omicron variant weigh on long-term yields.


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With COVID-19 still a threat to the economic environment, the path forward for interest rates—and in turn, the benefits of short versus long duration—has a degree of uncertainty. Rather than opting for a specific duration, investors can instead opt for a laddered bond approach.

Rather than targeting a specific duration, a bond ladder refers to a portfolio of fixed income securities where each bond has a different maturity date. For those willing to manage the ladder themselves, target maturity ETFs make this easy.

Two Options, Slight Differences

Invesco and iShares each offers a range of target maturity ETFs across a range of fixed income asset classes, with maturities currently stretching out to 2031. These funds offer a final maturity date, like a regular bond would, but offer more diversification by including hundreds of bonds within an ETF wrapper.

There are some differences between the two suites of target maturity funds. While both issuers offer corporate bond, municipal bond and high yield options, only iShares offers a target maturity fund consisting of Treasuries. Meanwhile, BulletShares is the only option for those wanting to create a ladder of emerging market debt.

For the most part, ETFs targeting the same bond type and maturity are priced at the same expense ratio regardless of issuer. The corporate bond ETFs are 0.10% and the municipal bond flavor rings up at 0.18%.

High yield is the exception, with the iBonds High Yield and Income ETFs charging 0.35%, while the Invesco BulletShares High Yield Corporate Bond ETFs cost 0.42%.


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However, as these types of ETFs are not generally used as trading vehicles, spreads can be higher and have a significant impact on the total cost of ownership.

There can also be some differences in the yields to maturity between two similar ETFs. For example, the iShares iBonds Dec 2022 Term Corporate ETF (IBDN) has a current YTM of 0.61%, while the Invesco BulletShares 2022 Corporate Bond ETF (BSCM) has a YTM of 1.02%. Across the corporate bond ETFs, Invesco’s BulletShares options offer a slightly higher yield, except for the ETFs that mature in 2021.

Building The Ladder

Investors can use these options to build a custom bond ladder, combining maturities in a way that fits their clients’ unique needs and obligations.

The ladder analogy can help investors think about the best way to build this type of strategy. The “rungs” sum up to your total investment. Divide this amount by the number of rungs, aka the number of maturities you wish to buy. The more rungs, the more diversification.

The “height” of the ladder refers to the distance between maturities. Using iBonds or BulletShares, investors could build a ladder with a height of one year (or longer). This means that investors would receive net assets at the stated maturity date on an annual basis, which can then be reinvested at the long end of the ladder if desired.

One-Stop Shop

For those who don’t want to manually build their own bond ladder, Invesco also offers the Invesco 1-30 Laddered Treasury ETF (PLW). This ETF tracks an index that invests in an equal-weighted 30-year ladder of U.S. Treasury securities.

The ETF charges 0.25%, more than three times as much as the iShares iBonds target maturity Treasury ETFs, which ring up at 0.07%. But PLW allows for a “set it and forget it” type approach to a bond ladder, as it is regularly rebalanced and reconstituted annually.

Investors should carefully consider whether this “off-the-shelf” ladder meets their specific needs, or if the extra effort to build the ladder themselves with target maturity ETFs might be a better fit.

Regardless of the method chosen, bond ladders are a time-tested approach to navigating uncertain rate environments for long-term investors.

The benefit of building a bond ladder in a rising rate environment is that, as bonds mature, the proceeds can be reinvested at higher rates. And in a falling rate environment, the proceeds from a maturing bond can be reinvested elsewhere, while the remaining rungs on the ladder are locked in at higher yields.

Contact Jessica Ferringer at [email protected] or follow her on Twitter

Jessica Ferringer, CFA, is a writer and analyst for She has 10 years of experience in investment research and due diligence, including helping to manage ETF portfolios. Jessica has a bachelor’s degree in economics from Lafayette College and an MBA from the University of Pittsburgh.