Build better bond ladders with iBonds® | iShares - BlackRock (2024)

FAQs

What are the best bonds for a bond ladder? ›

The types of bonds used in a bond ladder can vary, but they often include U.S. Treasurys, municipal bonds and corporate bonds. These bonds are selected based on their credit quality, interest rates and maturity dates to create a diversified portfolio that best fits the investor's financial goals and risk tolerance.

Downsides to Bond Ladders

One significant downside to bond ladders is the potential for lower returns compared to other investment options like equities. Bonds, particularly high-quality ones like government securities, typically offer lower yields than equities or other higher-risk investments.

It would take a large portfolio to meet all of an investor's income needs with a bond ladder alone. But over time, a bond ladder can help ensure that your eggs aren't all in one basket, and can help you manage in a changing interest rate environment.

iBonds ETFs hold diversified portfolios of cash bonds that mature in the same year. Each ETF provides regular interest payments and distributes a final payout at maturity. Similar to individual bonds, iBonds ETFs have a specified maturity date, so there is less exposure to interest rate risk as maturity approaches.

Bond Ladders. The liquidity and transparency of an ETF offers advantages over a passively held bond ladder. Bond ETFs offer instant diversification and a constant duration, which means an investor needs to make only one trade to get a fixed-income portfolio up and running.

There's a lot less flexibility, whereas with the bond ladder, you can choose to make different decisions. On the flip side, if you live to 108, that annuity is paying out for all those years, as long as you're alive, but the bond ladder doesn't go out that far, typically speaking.

The distance between the rungs is determined by the duration between the maturity of the respective bonds. This can range anywhere from every few months to a few years. Obviously, the longer you make your ladder, the higher the average return should be in your portfolio since bond yields generally increase with time.

It all depends on you. A bond ladder is similar to a CD ladder but uses bonds instead, which typically have longer terms. Bonds also aren't as secure as CDs, and the return isn't guaranteed. That said, the potential return can be higher with bonds than with CDs.

But if you go with the bond-laddering portfolio, you can earn 6.3% a year if rates go up, or 3.7% if rates go down. These results hold when comparing the laddering strategy with the long-term bond portfolio.

Variable interest rates are a risk you can't discount when you buy an I bond, and it's not like you can just sell the bond when the rate falls. You're locked in for the first year, unable to sell at all.

How long should I hold my I bonds? ›

You can cash in (redeem) your I bond after 12 months. However, if you cash in the bond in less than 5 years, you lose the last 3 months of interest. For example, if you cash in the bond after 18 months, you get the first 15 months of interest. See Cash in (redeem) an EE or I savings bond.

Interest earned on I bonds is exempt from state and local tax but subject to federal tax. The interest is taxed in the year the bond is redeemed or reaches maturity, whichever comes first.

In general, tax-exempt municipal bonds (munis) are more attractive to those in higher tax brackets. To compare municipal bonds to taxable bonds, you need to determine the tax-equivalent yield of the muni.

Therefore, the order from strongest to weakest bond is Ionic bond > Covalent bond > Hydrogen bond > Vander Waals interaction.

It's been said that a bond ladder shouldn't be attempted if investors do not have enough money to fully diversify their portfolio by investing in both stocks and bonds. The money needed to start a ladder that would have at least five rungs is usually at least $10,000.

U.S. Treasuries are considered among the safest available investments because of the very low risk of default. Unfortunately, this also means they have among the lowest yields, even if interest income from Treasuries is generally exempt from local and state income taxes.