How ETF Investors Can Lock in Higher Yields as Treasury Rates Jumped in October

In this week’s ETF Wrap, MarketWatch reporter Isabel Wang explores defined-maturity bond ladder ETFs, which can offer investors high yields and set maturity dates in response to the volatility in the bond market. These funds are designed to address interest-rate risks by locking in yields across different maturity dates, providing a more structured option compared to traditional bond funds.

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The recent spike in Treasury yields has made the U.S. bond market turbulent, with investors closely watching upcoming events, such as the U.S. presidential election and the Federal Reserve policy meeting. Unlike traditional bond funds, which hold assets indefinitely and adjust their portfolios to stay within a specific duration range, defined-maturity bond ladder ETFs are structured with fixed maturity dates, allowing investors to manage their interest-rate exposure more predictably. As bonds in these ETFs reach maturity, fund managers reinvest proceeds into longer-term securities, enabling investors to capture potential gains on the higher end of the yield curve while spreading interest-rate risks across bonds with different maturity dates.

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A notable example of this type of fund is BlackRock’s iShares iBonds 1-5 Year Treasury Ladder ETF, scheduled for release later this year. This ETF will follow an iBond index, with an equal allocation to five iShares iBond ETFs, each representing one of five consecutive years. Each year, the ETF will rebalance by replacing the maturing fund with a new five-year bond, maintaining the 20% weight for each constituent. According to Karen Veraa, head of U.S. iShares Fixed Income Strategy at BlackRock, the structure stabilizes the fund’s duration over time, providing an approach that gradually reduces interest-rate risk as the bonds mature.

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The appeal of bond ladder ETFs lies in their simplicity and stability, especially during periods of market volatility. Unlike managing a personal bond ladder, which involves the complexities of researching individual bonds, tracking coupon payments, and reinvesting at appropriate times, defined-maturity bond ladder ETFs offer a convenient alternative for investors. Constructing a traditional bond ladder, particularly with riskier corporate bonds, requires substantial credit analysis and ongoing attention. Veraa points out that bond ladder ETFs streamline this process, making them ideal for retail investors who might find manually managing bonds overwhelming.

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Ahead of the U.S. presidential election, investors in the bond market are concerned that the next administration, whether led by Republican Donald Trump or Democrat Kamala Harris, might contribute to the national fiscal deficit. The volatility index for the bond market, the ICE BofA MOVE Index, rose by over 42% in October, while yields on the 10-year Treasury note experienced their most significant monthly increase since April, reaching a high not seen since late July. As the Federal Reserve is expected to cut interest rates further, Veraa suggests that investors holding substantial cash in money-market funds might benefit from reallocating into bonds to secure higher yields before rates potentially decline.

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The current environment, according to Veraa, presents an excellent opportunity for locking in yields across a range of maturities. By using a bond ladder strategy, investors can gain exposure to different points in time without worrying as much about fluctuations in rates, as the ladder’s fixed maturities provide stability.

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In addition to BlackRock, other major asset managers are offering defined-maturity bond ladder ETFs to meet growing demand. Global X recently launched its series of Treasury ladder ETFs, including the Short-Term Treasury Ladder ETF, Intermediate-Term Treasury Ladder ETF, and Long-Term Treasury Ladder ETF, each aimed at providing different levels of duration exposure. Invesco, another prominent player in this space, offers its BulletShares lineup of ETFs, featuring funds for investment-grade and high-yield corporate bonds, as well as municipal bonds, all with specific maturity years ranging from 2024 to 2034.

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For those exploring ETFs, FactSet data provides insight into recent performance trends. The YieldMax TSLA Option Income Strategy ETF topped the list with a 14.8% return over the past week. Other notable performers included Grayscale Bitcoin Mini Trust, VanEck Bitcoin ETF, Franklin Bitcoin ETF, and ProShares Bitcoin ETF, which each achieved around 9.4% to 9.5% returns. This data excludes exchange-traded notes and leveraged products, focusing on U.S. ETFs traded on the NYSE, Nasdaq, and Cboe with assets of at least $500 million.

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In summary, defined-maturity bond ladder ETFs offer investors a flexible, manageable way to build a bond portfolio with controlled interest-rate risk, benefiting from fixed maturity dates that align with the investor’s timeline. As market uncertainties rise, these bond ladder ETFs are an appealing option for those looking to secure high yields and navigate the bond market with greater predictability.

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