A reader writes in, asking:
“I would be interested in hearing your thoughts on building a laddered portfolio of bonds using the Guggenheim Bulletshares Corporate Bond funds as opposed to a general corporate bond ETF or mutual fund to generate income and reduce risk.”
For readers who have not yet encountered them, the Bulletshares funds are ETFs that hold collections of bonds that mature within (or near) a given year. For example, if you look up the Bulletshares 2019 Corporate Bond ETF on Morningstar and click over to the “portfolio” tab, you’ll see that more than 99% of the portfolio is invested in bonds with maturities in the 5-7 year range. When the date in the name is reached, the plan for the fund is to distribute all of its assets (which should mostly just be cash at that point) back to fund shareholders.
This is in contrast to the typical passively managed bond fund, which is more akin to a bond ladder that perpetually renews itself.
If your investment horizon is indefinite (or just very long, as it is for most investors prior to retirement), a perpetually-renewing bond ladder (i.e., a normal bond fund) is a good fit. But if you are planning to satisfy specific expenses at specific points in time (e.g., $X of living expenses each year for the next Y years), you would prefer a bond ladder that does not constantly renew itself. For that purpose, fixed-maturity bond funds such as the Bulletshares ETFs could potentially be helpful.
I like that the Bulletshares funds have a fairly modest expense ratio of 0.24%. That’s somewhat higher than what you’d pay with a simple bond index fund, but it’s still within reason in my opinion.
In addition, I like that they don’t include Treasury bonds — not because I think Treasury bonds are bad to own, but because it’s relatively easy to build a bond ladder on your own with Treasury bonds given that (unlike with corporate bonds) there is no need to diversify among borrowers. In other words, if I were going to create a ladder out of Bulletshares ETFs, I would probably supplement it with a Treasury (likely TIPS) ladder that I build on my own.
Unfortunately, the fact that the funds’ maturity dates only go out to 2020 significantly limits their usefulness. For most investors, retirees included, there’s clearly a need to plan more than 7 years into the future. Of course, you can create a rolling bond ladder with these fixed-maturity ETFs. But if you do that, you’ve basically just built a conventional corporate bond fund — one that requires extra work and that has higher costs than necessary.
In short, I think fixed-maturity bond funds like these are useful in certain situations (namely, when you want to plan for specific expenses in the not-so-distant future). But as a general retirement planning tool, they don’t become particularly helpful until well into retirement for most people.