Build an Active Bond Ladder with SPDR® MyIncome ETFs

Bond investors rely on the income generated by their investments to meet expenses or fund retirement. But today’s unprecedented rate volatility continues to challenge those income expectations.

Bond ladders — regardless of the market environment or the direction of interest rates — can create a reliable income stream, while minimizing the impact of interest rate moves.

SPDR MyIncome ETFs — nine corporate bond and five municipal bond funds — are a suite of actively managed target maturity ETFs to help investors build active bond ladders with the potential for higher yields and more effective risk and cash management.

Why Use Active Bond Ladders?

Inefficiencies are common in the fixed income market due to market complexity, institutional constraints, and behavioral biases. There are also structural reasons why active management makes sense for bond investors:

• Index Construction: A bond index’s weightings are proportionate to the level of debt issued by its constituents, often leading to higher concentration in issuers with potentially unattractive characteristics.
• Index Composition: Frequent changes in a bond index’s composition can lead to large price swings for bonds joining or leaving the index.
• High Turnover/New Issuance: Due to bonds maturing, new bond issuance makes up a much larger portion of outstanding bonds relative to other segments. And, an actively managed target maturity strategy can potentially be more selective in the new issue market than an indexed-based target maturity strategy can be, given an active manager’s increased flexibility.

Choosing active target date funds to construct a bond ladder can mitigate that risk because they focus on:

Active Bond Ladder Benefits

Building a ladder with active target maturity ETFs delivers a number of potential benefits compared to creating a ladder with indexed bond ETFs:

• Higher Yields: Allocating to a portfolio of bonds can out-yield the respective index, whether through credit quality differences or industry or company selection.
• Greater Diversification: Given index inclusion is determined by maturity year, there may be diversification challenges or concentration risks with single issuers. An active approach can ensure diversification across industries and issuers, creating a more balanced fund.
• Efficient Risk Management: Responding to evolving market conditions can involve adjusting risk factors like credit spread exposures. While an active bond ladder approach sometimes involves more risk, it’s also possible that the portfolio could be less risky if the goal is to defend against expected downgrades or credit weakness.

What Distinguishes Our Active Investment Process?

Designed to provide strong after-fee performance through a robust investment process and risk management, the active approach used for the SPDR MyIncome ETFs works this way:

The flexible guidelines of the SPDR MyIncome ETFs allow the portfolio management team to pursue its investment objective of maximizing yield while preserving capital through a robust investment process and prudent risk management.

For example, while both the Corporate Bond Target Maturity Funds and Municipal Bond Target Maturity ETFs must invest at least 80% of their assets in corporate or municipal bonds maturing in the target year, they can also invest up to 10% in below investment-grade corporate or municipal bonds and up to 20% in corporate or municipal bonds maturing six months prior or after target year. Both may also use derivative instruments.

When Do Active Bond Ladders Add the Most Value?

Big picture, compared to general indexed bond ladders, active ETF ladders have the ability to match cash flows with liabilities as the duration of the active ETFs rolls down to zero over the life of the products. This allows investors to target specific areas of the yield curve, which isn’t possible with broad indices.

An active approach to ladders also can add significant value during an economic downturn as deteriorating credit conditions may lead to an uptick in default rates and downgrades. Prudent risk management and a top-down approach, combined with bottom-up security selection through rigorous credit research, can help avoid weaker sectors and issuers that may come under stress, resulting in better overall performance.

Consider SPDR MyIncome ETFs

While the future interest rate path is uncertain, many investors currently have an overweight to the short end of the curve or cash. And that means they’ll have to deploy cash back into the bond markets. Bond ladders could help investors slowly move out the curve, adding shorter maturities and then more intermediate maturities as they gain confidence in the future interest rate environment. Active bond ETF ladders provide this flexibility plus the additional potential benefits of increased yield and better risk and cash management.

Of course, building an active bond ladder on your own can involve extensive time and resources. So, let us do the work.

With the SPDR MyIncome ETFs, all you need to do is choose the custom maturity that reflects your risk preferences and investment goals for each rung on your bond ladder.