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ETF Specialist

Watch Your Step When Using Bond Ladder ETFs

Bond ladder ETFs can reduce cost and risk and can increase liquidity. However, investors should be aware of some potential drawbacks.

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Institutional investors, such as insurance companies and pension plans, have long used their bond portfolios to match their interest and principal repayments with their cash flow needs. One way to accomplish this is to construct a portfolio of bonds with different maturity dates that correspond with the investor’s obligations. This is known as a bond ladder, and it can help mitigate interest-rate and liquidity risk. However, building a bond ladder can be expensive and time-consuming. Because bonds are traded over the counter, bid-ask spreads may be wide. Additionally, brokerage firms can charge high commissions for bond trades.

Thomas Boccellari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.