Here's how ETF investors can lock in higher yields as Treasury rates jumped in October

MW Here's how ETF investors can lock in higher yields as Treasury rates jumped in October

By Isabel Wang

Hello! This is MarketWatch reporter Isabel Wang, bringing you this week's ETF Wrap. In this edition, we look at defined-maturity bond ladder ETFs, which could help investors lock in high yields and maturity dates to match their investment goals during periods of heightened bond-market volatility.

Please send tips or feedback to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on X at @Isabelxwang and Christine at @CIdzelis.

Sign up here for our weekly ETF Wrap.

The U.S. bond market on Thursday wrapped up a tumultuous month, as the rally in Treasury yields picked up steam ahead of next week's U.S. presidential election and Federal Reserve policy meeting.

One way to take advantage of that attractive yield while sidestepping interest-rate risk is to invest in a lesser-known type of bond ETF - a defined-maturity bond ladder fund.

This type of ETF is different from a typical bond fund that holds Treasurys, TIPS, corporate bonds or high-yield bonds, which never matures and would buy or sell bonds through its life to keep its portfolio in the designated duration range. Defined-maturity bond ladder funds, as the name implies, stick to a predefined maturity date.

Investors are using these funds to build bond ladders, a strategy that involves purchasing a variety of bonds with staggered dates. As each bond matures, fund managers reinvest that money into newer, longer-maturity fixed-income securities at the top of the ladder, allowing investors to benefit from potentially higher rates on the longer end of the yield curve while spreading the interest-rate risks across bonds with different maturity dates.

For example, BlackRock's iShares iBonds 1-5 Year Treasury Ladder ETF, which is set to launch later this year, will track an iBond index that consists of an equal 20% allocation to five iShares iBond ETFs spanning five consecutive years. The index will be reconstituted and rebalanced annually by replacing the one that matures in the current year with one that terminates five years forward and assigning equal weights to each constituent, Karen Veraa, head of iShares fixed-income strategy within BlackRock's Global Fixed Income Group, said in a press release earlier this week.

"The main difference is the defined-maturity bond ladder ETFs go down to maturity, so you'll see the duration or the interest-rate risk in each fund going down and remaining pretty stable over time," Veraa told MarketWatch in a follow-up interview on Thursday.

Bond ladder ETFs are not a cure-all, but they do offer a more stable option for investors trying to navigate the current volatile interest-rate environment when compared to building a portfolio of individual bonds themselves, according to Veraa.

To be sure, manually building a bond ladder can be "operationally cumbersome" for most retail investors, as it requires a significant amount of work to conduct the credit research for each bond - especially for riskier corporate bonds - and to stay on top of all the coupon payments and reinvestments, Veraa said.

See: The bond market is rarely this volatile outside of a crisis. Blame the U.S. election.

With less than a week until the U.S. presidential election, bond-market investors have been increasingly worried that the incoming administration - whether that of Republican Donald Trump or Democrat Kamala Harris - could exacerbate the government's fiscal deficit.

The ICE BofA MOVE Index, which tracks fixed-income market volatility, surged more than 42% in October as the yield on the 10-year Treasury note BX:TMUBMUSD10Y posted its biggest monthly yield advance since April. The 10-year rate on Thursday also ended at its highest level since July 24, according to FactSet data.

See: Fed goes quiet ahead of its Nov. 7 meeting, with quarter-point cut seen as likely

Investors hiding in money-market funds for years may want to dump "hefty cash allocations" and return to the bond market to lock in higher yields before the Fed continues on its path of cutting interest rates, Veraa noted.

"This is a great time to lock in yields and term out some of those maturities - and doing it with a bond ladder is a great way to basically not have to worry about changes in rates, because you've locked in those yields over multiple periods," she said.

BlackRock is not the only fund developer providing defined-maturity bond ladder funds. Last month, Global X announced the launch of the Global X Short-Term Treasury Ladder ETF SLDR, the Global X Intermediate-Term Treasury Ladder ETF MLDR and the Global X Long-Term Treasury Ladder ETF LLDR.

Invesco is another major provider, with its BulletShares line of ETFs including defined-maturity funds for investment-grade and high-yield corporate debt as well as municipal bonds - each with a designated year of maturity ranging from 2024 through 2034, according to the company's website.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good...

   Top performers                                                                                                                                                                       %Performance 
   YieldMax TSLA Option Income Strategy ETF                                                                                                                                             14.8 
   Grayscale Bitcoin Mini Trust                                                                                                                                                         9.5 
   VanEck Bitcoin ETF                                                                                                                                                                   9.4 
   Franklin Bitcoin ETF                                                                                                                                                                 9.4 
   ProShares Bitcoin ETF                                                                                                                                                                9.4 
   Source: FactSet data through Wednesday, Oct. 30. Start date Oct. 24. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                     %Performance 
   AdvisoShares Pure US Cannabis ETF     -12.8 
   United States Oil Fund LP             -5.3 
   iShares MSCI Global Gold Miners ETF   -4.4 
   Utilities Select Sector SPDR Fund     -3.5 
   Sprott Uranium Miners ETF             -3.4 
   Source: FactSet data 

New ETFs

-- Jeremy Grantham's GMO on Tuesday announced the launch of three new actively managed ETFs: GMO International Quality QLTI, GMO U.S. Value GMOV and GMO International Value GMOI.

-- Amplify ETFs on Tuesday announced the launch of the Amplify Bloomberg U.S. Treasury Target High Income ETF TLTP, which allows investors to tap into the stability of Treasurys while seeking to generate "high, consistent levels of income" through a covered-call option strategy, the firm said in a press release.

Weekly ETF Reads

-- Goldman Sachs managing director makes the case for a modified low-volatility ETF (MarketWatch)

-- ETFs Are Where the Fun Is (Bloomberg)

-- In Red/Blue America, Hard Lessons About the Color of Money (Bloomberg)

-- VOO vs SPY: Comparing the Top S&P 500 ETFs (ETF.com)

-- Is It Time to Reconsider Dividend Funds? (MorningStar)

-Isabel Wang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 31, 2024 18:38 ET (22:38 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.