With Federal Reserve rate cuts now underway, investors may want to make sure they have the right bond strategy. One way to get a predictable source of income — and some comfort in knowing you'll get your investment back at maturity — is to build a bond ladder. A ladder is essentially owning a series of issues that have staggered maturities.
When a bond matures, the money can be reinvested again at the end of the ladder. The strategy is meant to minimize interest rate risks, explained Saraja Samant, a manager research analyst at Morningstar. "When interest rates are going lower, even if the nearest rung matures and you're going to reinvest that at a lower rate, you have the maturity portion of your portfolio still locked in at now higher rates," she said.
The strategy typically uses bonds or defined maturity exchange-traded funds , like Invesco's BulletShares and BlackRock's iBonds . Defined maturity ETFs provide diversity like traditional funds but have maturities and liquidate like a bond. Global X recently launched three ETFs that have a Treasury ladder within the fund.
Its short-term Treasury ladder ETF focuses on securities maturing between one to three years, its intermediate-term fund aims for exposure on securities maturing between three and 10 years and its long-term ETF targets those maturing in 10 to 30 years. The funds each have total expense ratios of 0.12%.
Global X believes this is the right time for these types of funds. "By entering into a Treasury Ladder .