How much do laddered bond ETFs differ from bond ETFs that bound maturity?
Abbreviate LD BETF as laddered bond ETFs.
'BETFs that bound maturity' are UNladdered but impose a maximum limit on maturity of bonds, which I denote Bound BETF, and abbreviate as BD BETF.
This question presumes an impending increase in interest rates. I recognise that an unbounded, typical ETF can hold bonds of 20+ years to maturity (cf XCB, XGB), which both LD BETFs and BD BETFs don't hold.
However, how much do LD BETF differ from BD ETF? They seem more similar because albeit unladdered, BD BETF must still buy new bonds continually after old bonds expire. For example:
1.1 iShares 1-5 Year Laddered Corporate Bond Index ETF (CBO)
1.2. BMO Short Corporate Bond Index ETF (ZCS), whose maximum maturity is 5 years.
1.3. iShares 1-5 Year Laddered Government Bond Index ETF (CLF)
(Unlike BMO, iShares does not offer separate ETFs for federal and provincial bonds)
1.4. BMO Short Federal Bond Index (ZFS) & BMO Short Provincial Bond Index (ZPS),
whose maximum maturities are 5 years.
2.1 iShares 1-10 Year Laddered Corporate Bond Index ETF (CBH)
2.2. BMO Mid Corporate Bond Index ETF (ZCM), whose maximum maturity is 10 years.
2.3. iShares 1-10 Year Laddered Government Bond Index ETF (CLG)
2.4. BMO Mid Federal Bond Index ETF (ZFM) & BMO Mid Provincial Bond Index (ZMP ), whose maximum maturities are 10 years.
PS: The unified list of ETFs can be found on BlackRock and BMO.
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From Investopedia (after websearching "define laddered bond fund"):
DEFINITION of 'Bond Laddering'
A portfolio management strategy and model for investing in fixed
income that involves purchasing multiple bonds, each with different
maturity dates, in order to achieve the following goals:
Decrease interest rate risk by holding both short-term and long-term bonds, thereby spreading risk along the interest rate curve. If rates
are rising, as one bond matures the funds can be re-invested into
higher yield bonds.
Decrease re-investment risk because as one bond in the ladder matures, the cash is re-invested, but it only represents a portion of
the total portfolio. Even if prevailing rates at the time of
re-investment are lower than the previous bond was returning, the
smaller amount of reinvestment dollars mitigates the risk of investing
a lot of cash at a low return.
Maintain steady cash flows to encourage regular saving for investors looking for an income-producing portfolio.
Read more: Bond Laddering Definition | Investopedia http://www.investopedia.com/terms/b/bondladdering.asp#ixzz3lgo7rBkd
IMO laddered bond ETFs are just a marketing ploy. Many electrons have been wasted on the debate of laddering your own bond portfolio vs just buying an ETF. Now you can the best(worst) of both worlds, a laddered ETF.
Before making a decision, go to the website and read about each fund. Then buy something appropriate. I just checked CBO and the 5 year ladder has a 5-7 year tranche and they've 'enhanced' the index by allowing BBB bonds as well.
One advantage of ladders may be lower transaction costs since they buy larger amounts of single issues in one shot. However I doubt this has much, if any, effect on total costs.
A regular BD ETF has a significant advantage in that they can sell bonds before maturity. A good portion of profit can come from capital gains with a normal to steep yield curve. Imagine buying a 5 year bond at 2% and then selling it after 4 years. It's now a 1 year bond yielding 0.5%. A drop in YTM creates a capital gain. This can amount to several 10s of basis points depending on the yield curve.
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