Recent Insights from Dimensional -- Chutes and Bond Ladders
Chutes and Bond Ladders
By Wes Crill, PhD Senior Investment Director and Vice President
Originally published December 7, 2023
Some investors use bond ladders for fixed income exposure. A portfolio of bonds with maturities spaced out across a range of years provides a stream of cashflows that decreases the uncertainty around meeting future liabilities. But the tradeoff for this benefit is potentially leaving returns on the table.?
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Take a five-year Treasury ladder, for example. This approach provides exposure across the zero to five-year segment of the yield curve. Currently, the highest yield within Treasuries can be found at three months. But the ladder buys throughout the available maturities, which offer increasingly lower yields. Bond ladders ignore information in prices about expected returns.?
Laddering also exposes investors to the typical drawbacks of purchasing individual bonds. A lack of diversification constrains the opportunity set, preventing investors from increasing expected returns through credit exposure or enjoying economies of scale in transaction costs. ?
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Bond ladders are a tradeoff that comes with risk, just like step ladders—and there’s a reason I don’t do my own roof repairs.
Disclosures
All expressions of opinion are subject to change. This information is not meant to constitute investment advice, a recommendation of any securities product or investment strategy (including account type), or an offer of any services or products for sale, nor is it intended to provide a sufficient basis on which to make an investment decision. Investors should consult with a financial professional regarding their individual circumstances before making investment decisions. Diversification neither assures a profit nor guarantees against loss in a declining market.?
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