Take a video tour
of the bond ladder tool and learn how you can build a portfolio of bonds to help create a consistent stream of income over time.
Because the
purpose of a bond ladder is to provide predictable income over a long period of time, taking excessive amounts of credit risk probably doesn't make sense.
Setting up a
type of bond ladder in these funds would be a very nice addition to a general bond fun in a portfolio if investors want to manage it.
Maybe it would be a good decision to sell your bonds, maybe not, but wasn't the entire
point of the bond ladder to take away the guessing game of what's going to happen with interest rates?
Another important
feature of a bond ladder is the total length of time the ladder will cover and the number of rungs, or how often the bonds in the ladder are scheduled to mature, returning your principal.
Part of the
beauty of a bond ladder is the scheduled cash flow; you know when the bonds will mature and you know how much you will need to reinvest.
To maintain the ladder, money that comes in from currently maturing bonds is typically invested in bonds with longer maturities within the
range of the bond ladder (see Figure 1).
PowerShares 1 - 5 Year Laddered Investment Grade Corporate Bond ETF (TSX: PSB) tracks the
performance of a bond ladder comprised of Canadian investment - grade corporate bonds maturing in one to five years.
If you own a bond ETF as most bond investors increasingly should then you basically own a less organized
version of a bond ladder because the whole portfolio is diversified across varying maturities.
To receive the full
benefit of a bond ladder, one needs not only to stay the course for a number of years (so that lower yield and higher yield purchases benefit from cost averaging), but also with a relatively stable amount of capital.
That's because many of the benefits
of bond ladders — such as an income plan and managing interest rate and credit risk — are based on the idea that you keep your bonds in your portfolio until they mature.
Another key benefit
of bond ladders is that they are a great way to manage the two major risks facing fixed - income investors.