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At The Money: Building A Bond Ladder · Masters in Business

• 0:00
  Speaker 1: We can predict the future. Over the past decade or
• 0:17
  Speaker 1: maybe even longer, no one's accurately predicted which way rates
• 0:21
  Speaker 1: were going. Are they gonna rise, are they gonna fall?
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  Speaker 1: Are they're gonna stay steady. This creates a challenge for
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  Speaker 1: bond investors, who are usually looking for a predictable income
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  Speaker 1: stream from their fixed income holdings. One solution create a
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  Speaker 1: ladder of bonds of different maturity rates, so that regardless
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  Speaker 1: of what occurs, you have a predictable yield series. You
• 0:46
  Speaker 1: can lock in higher yielding paper if rates fall, but
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  Speaker 1: you also free up more capital on an annual basis
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  Speaker 1: if rates rise. I'm Barry rid Heltson on today's edition
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  Speaker 1: of At the Money. We're going to show you how
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  Speaker 1: to create a bond ladder to help us unpack all
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  Speaker 1: of this and what it means for your fixed income portfolio.
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  Speaker 1: Let's bring in Karen Vera is head of ice Shares
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  Speaker 1: us fixed income strategy for investing Giant Blackrock. So let's
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  Speaker 1: start simply, what is a bond ladder.
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  Speaker 2: A bond ladder is a simple tool for investing in
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  Speaker 2: the bond market. You take your investing window, let's say
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  Speaker 2: ten years, and you equally wait, every maturity across that
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  Speaker 2: ten year period, so you've got bonds that mature in
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  Speaker 2: one year, two year, three years, and so on. It's
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  Speaker 2: a very popular strategy because, as you just mentioned, Barry,
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  Speaker 2: you don't have to make bets on interest rate risk.
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  Speaker 2: You kind of have your investing horizon and you've got
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  Speaker 2: this more predictable stream of income as well as maturity
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  Speaker 2: is coming do each year where you can make a
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  Speaker 2: decision about going in the next run on the bond
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  Speaker 2: ladder or doing something else with that money.
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  Speaker 1: We always seem to divide bond ladders into each rung
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  Speaker 1: is the same equity amount. What's the thinking there.
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  Speaker 2: We do see that as being the most popular. It's
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  Speaker 2: because you can think through that, I'm going to have
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  Speaker 2: a certain amount of money. Let's say I've got one
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  Speaker 2: hundred thousand dollars to invest and it's a ten year ladder.
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  Speaker 2: I've got ten thousand coming do each year. You can
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  Speaker 2: kind of think of it in chunks like that. We
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  Speaker 2: do see some people who are laddering out amounts and
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  Speaker 2: retirement accounts and they need to take those required minimum
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  Speaker 2: distributions where they will look at the irs schedule of
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  Speaker 2: how much they have to pull out of the account.
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  Speaker 2: It's not quite equal, but you can even ladder out
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  Speaker 2: those required minimum distributions. You know, it's about eight percent
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  Speaker 2: instead of ten percent in the first year, for example,
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  Speaker 2: and then you don't have to sell anything inside your
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  Speaker 2: retirement account and you can just pull those out on schedule.
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  Speaker 2: So that's another way that people weight their bond ladders
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  Speaker 2: when they're seeking that goal of having those rmds coming
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  Speaker 2: do every year.
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  Speaker 1: Let's talk about what goes into bond ladders. I'm assuming
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  Speaker 1: a mix of US Treasury bonds, munis, investment grade corporates,
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  Speaker 1: even high yielding CDs, anything else go into the mix
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  Speaker 1: for bond ladders.
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  Speaker 2: I'd say the most popular tends to be the munis
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  Speaker 2: and corporate bonds and the investment grade side. We offer
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  Speaker 2: a suite of exchange traded funds that mature each year,
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  Speaker 2: and they're primarily used to build bond ladders. We have
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  Speaker 2: these in high yield as well for people who want
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  Speaker 2: to go out and add a little bit more income
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  Speaker 2: and credit risk of the portfolios. We also even have
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  Speaker 2: them in the tips market. So these days you can
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  Speaker 2: build a bond ladder using all these different asset classes.
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  Speaker 2: I think some of the challenges with CDs is typically
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  Speaker 2: they're limited in their term. They may only go out
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  Speaker 2: up to five years, and sometimes the banks will have
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  Speaker 2: restrictions or penalties if you want to sell them early
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  Speaker 2: or try to get your money back early. So we've
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  Speaker 2: seen people migrate away from CD ladders, doing it more
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  Speaker 2: with bond and bondytfs to build these ladders.
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  Speaker 1: How to investors determine what their timeline is? I think
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  Speaker 1: that's a pretty interesting choice, and most people just seem
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  Speaker 1: to assume it's ten years. But from what I've seen,
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  Speaker 1: there are a variety of timelines.
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  Speaker 2: I think people can think about it if they have
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  Speaker 2: a liability that they're managing to or a a time
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  Speaker 2: based goal. We see people sometimes building ladders let's say
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  Speaker 2: three to seven years, because maybe they have a cash
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  Speaker 2: portfolio for things the next couple of years, but then
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  Speaker 2: they don't want to start their ladder out for a
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  Speaker 2: few years. One to five tends to be the most
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  Speaker 2: popular based on data that we have around assets in
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  Speaker 2: those different account types. We rarely see people go out
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  Speaker 2: past ten years. I do see people asking for fifteen
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  Speaker 2: because I think with the bond ladder you can accomplish
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  Speaker 2: most of your goals within that time horizon of having stability,
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  Speaker 2: having income rolling it every year. We also see on
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  Speaker 2: the corporate side, corporate issues will issue ten year bonds
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  Speaker 2: and they might do a thirty year bond, but there's
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  Speaker 2: not really that much paper that's actively being issued beyond
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  Speaker 2: ten years. So what tends to happen is there's just
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  Speaker 2: not that many new issues and it's hard to find
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  Speaker 2: the bonds. So I think that's another reason why that
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  Speaker 2: tenyure point tends to be the maximum for most people's ladders.
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  Speaker 1: We never know what yields will be in the future.
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  Speaker 1: How can an investor lock in the best yields on
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  Speaker 1: the ration curve today and benefit over the next decade
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  Speaker 1: with their ladders.
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  Speaker 2: Well, we do have an inverted yield curve right now,
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  Speaker 2: so we've seen a lot of people overweighting their ladders
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  Speaker 2: in that one to two year bucket trying to maximize income.
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  Speaker 2: Maybe they do might do an extra forty fifty percent
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  Speaker 2: than what they would usually do, But I think one
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  Speaker 2: of the nice things you can do now is try
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  Speaker 2: to lock in the yields for the interim. We've been
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  Speaker 2: telling people on the corporate side, you can get about
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  Speaker 2: five percent by continuing to go out six to seven
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  Speaker 2: percent for high yield, And so we're seeing people who
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  Speaker 2: are doing that right now, knowing that when the FED
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  Speaker 2: starts to cut rates, interest rates are going to come down,
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  Speaker 2: and they want to put some of that cash to
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  Speaker 2: work and consistently beginning four five six percent rather than
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  Speaker 2: have it dissipate in those short term vehicles as soon
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  Speaker 2: as interest rates go down.
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  Speaker 1: I continue to see people who are waiting for inflation
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  Speaker 1: to reaccelerate. They're warning that the Fed is looking at
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  Speaker 1: this incorrectly and that we should be expecting much higher
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  Speaker 1: yield if that were to happen. Didn't someone who just
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  Speaker 1: set up a bond ladder lock in low rates or
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  Speaker 1: how does the ladder work in the face of that?
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  Speaker 2: So when I think about the ladder, it's going to
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  Speaker 2: be a more known investment result than some other more
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  Speaker 2: perpetual bond strategy. So you kind of know what your
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  Speaker 2: yield's going to be over that period. You can do
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  Speaker 2: a few things. You could use tips, so we have
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  Speaker 2: for example, tips Term Maturity ETFs tips eebonds where you
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  Speaker 2: can get protected for the inflation, but you also have
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  Speaker 2: the periodic income payments kicking out the ladder that you
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  Speaker 2: can reinvest at higher yields, which will add income over time.
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  Speaker 2: And you also have that discrete point when something matures
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  Speaker 2: this year, you can go and grab more income. So
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  Speaker 2: what we see is as yields go up, you're slowly
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  Speaker 2: walking that ladder up and recouping more of the income
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  Speaker 2: over time.
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  Speaker 1: What about the opposite group of prognosticators, the ones who've
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  Speaker 1: been forecasting the recession every year for the past three years,
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  Speaker 1: that just hasn't showed up. If there's a recession and
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  Speaker 1: rate rates fall pretty radically, what happens then what's our
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  Speaker 1: reinvestment risk there?
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  Speaker 2: So if you've got your ladder locked in it today's
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  Speaker 2: yields and yields come down, that ladder income stream is
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  Speaker 2: worth more. So I'll actually the prices on the bonds
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  Speaker 2: go up in that situation. But then you're right when
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  Speaker 2: the money comes to you're going to be reinvesting at
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  Speaker 2: lower rates, and then over time that will go down
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  Speaker 2: a bit. If you are worried about a recession, I
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  Speaker 2: would say go up in quality. Stick to Treasury's investment grade.
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  Speaker 2: The higher quality, even MUNI is the higher quality asset
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  Speaker 2: classes that you don't have to worry about as much
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  Speaker 2: default risk and volatility if we do have a coming recession.
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  Speaker 1: I know you're the strategist for ey Shares, which issues
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  Speaker 1: a lot of ETFs. When I first started in the
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  Speaker 1: nineteen nineties, bond ladders were all individually owned papers and
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  Speaker 1: separately managed accounts. Everything was hand selected, the minims were
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  Speaker 1: pretty high, the cost structure was pretty high. The state
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  Speaker 1: of the art stay that way for decades. It seems
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  Speaker 1: to have gotten a whole lot better, cheaper, faster, easier today.
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  Speaker 1: How what is the state of the art building a
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  Speaker 1: bond ladder using ETFs.
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  Speaker 2: I think this is one of the innovations that has
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  Speaker 2: really come about in the last decade. No longer do
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  Speaker 2: you have to have a million dollars to create a
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  Speaker 2: spoke bond ladder with an SMA manager. You can do
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  Speaker 2: it today for very little amounts of money. And so
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  Speaker 2: what we've seen is our EE bonds have been popular
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  Speaker 2: inside smaller account sizes. If you've got one off account
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  Speaker 2: over here, or even if you have a lot of money,
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  Speaker 2: it's just a very efficient way to do that. So
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  Speaker 2: our I bonds ETFs or term maturity ETFs, they have
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  Speaker 2: a maturity date typically each December, and they're holding bonds
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  Speaker 2: that mature throughout the calendar year, and then when the
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  Speaker 2: last bond matures, the ETF will dlist from the exchange
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  Speaker 2: and you'll have cash hitting you account just like a
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  Speaker 2: bond maturity. And we've got them now in treasuries, tips, communis,
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  Speaker 2: investment grade, and high yield, so five different sectors of
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  Speaker 2: the bond market. And then we've seen people really customize
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  Speaker 2: things for their income needs, for their tax status, and
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  Speaker 2: they're getting exposed to hundreds of bonds in a single
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  Speaker 2: ETF as opposed to what we see with a lot
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  Speaker 2: of SMAs as they might be limited to maybe twenty
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  Speaker 2: to thirty bonds at the most. So you're getting diversification
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  Speaker 2: at a very low cost. And because they are exchange traded,
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  Speaker 2: if you change your mind and want to sell them,
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  Speaker 2: you can at any point where a lot of times
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  Speaker 2: with the bond it's really easy to buy it, but
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  Speaker 2: then maybe when you go to sell it it's hard
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  Speaker 2: to find a buyer or there's large transaction costs associated
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  Speaker 2: with that.
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  Speaker 1: So I'm hearing diversification, lower costs, liquidity. You mentioned they
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  Speaker 1: all the ETF will mature at the end of the year,
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  Speaker 1: so you have a defined maturity. Obviously, no callable bonds
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  Speaker 1: go into that, but it seems working with an ETF
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  Speaker 1: gives you I'm doing a little bit of a commercial here,
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  Speaker 1: but my firm uses a lot of ETFs. We're very
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  Speaker 1: happy with them. You get a lot of flexibility and
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  Speaker 1: professional management. This really seems to be much better than
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  Speaker 1: the battle days when someone was handpicking dozens of individual bonds.
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  Speaker 2: Yeah, we still see people who are preferring that. Like
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  Speaker 2: let's say you have special you're in a high tech
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  Speaker 2: state and you want a special SMA dedicated to that.
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  Speaker 2: So we see people even using our eyebonds alongside sms
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  Speaker 2: or alongside other strategies, or maybe they're whittling those down.
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  Speaker 2: Like we don't tell people go out and sell your
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  Speaker 2: bond portfolio. You're curated over decades. However, this is a
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  Speaker 2: great strategy I think to provide some liquidity, diversification and
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  Speaker 2: low cost access to these different parts of the bond market.
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  Speaker 1: One of the advantages of working with various large firms
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  Speaker 1: like yourself, I Shares, Fidelity, Schwab, whoever. You have a
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  Speaker 1: variety of online tools to build your own bond ladder
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  Speaker 1: tell us a little bit about what people can find
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  Speaker 1: if they want to just do it themselves.
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  Speaker 2: If you go to ihers dot com backslash eyebonds, you'll
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  Speaker 2: find our landing page and there's a link to our
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  Speaker 2: Eyebonds ladder tool. And we just find this to be
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  Speaker 2: just like a report that you would get if you
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  Speaker 2: went to a bond manager and asked for a bond ladder.
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  Speaker 2: You can input your dollar amount, you can check the
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  Speaker 2: box on which sectors of the bond market you want
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  Speaker 2: to be invested in, and there's even a slider where
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  Speaker 2: you can look at your maturities and right away it
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  Speaker 2: will give you an equal weighted ladder. You can then
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  Speaker 2: customize that ladder if you like. You can delete things
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  Speaker 2: you don't want, and it will have some summary characteristics
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  Speaker 2: the number of bonds, the duration, the yield, the cost,
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  Speaker 2: and I think it's a great way to just visualize
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  Speaker 2: those yields. Like we have people who will come in
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  Speaker 2: and they want to know what different maturities of the
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  Speaker 2: bond market are yielding. They can go in and look
• 11:37
  Speaker 2: in and see where the treasure curve is, the investment
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  Speaker 2: grade curve, the highyield curve, and I think it's just
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  Speaker 2: a great source of information to even go in and
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  Speaker 2: see what the different parts of the market are yielding.
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  Speaker 1: So to sum up. Investors that are looking for yield
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  Speaker 1: but are concerned about interest rates going up, down, and
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  Speaker 1: all over the place can solve for that problem by
• 11:56
  Speaker 1: creating a ladder of bond ETFs, spreading it out of
• 12:00
  Speaker 1: five to ten years, so their interest rate risk is reduced.
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  Speaker 1: They're locking in rates now, and if rates go higher
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  Speaker 1: as things mature, they can reinvest it. And if rates
• 12:09
  Speaker 1: go down, hey, well at least you locked in a
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  Speaker 1: higher rate for the first half of those investments. It
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  Speaker 1: seems to make a lot of sense, and especially if
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  Speaker 1: you're working towards a specific liability or a specific goal
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  Speaker 1: where you have an obligation down the road, this allows
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  Speaker 1: you with very little risk to hit those targets.
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  Speaker 2: That's right. We were seeing all kinds of investors using
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  Speaker 2: them for different goals and objectives, different different terms, and
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  Speaker 2: I think it really empowers people to do it themselves
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  Speaker 2: and invest in the bond market.
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  Speaker 1: Thank you, Karen, This has been really interesting. I'm Barry Riddholts.
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  Speaker 1: You've been listening to At the Money on Bloomberg Radio.
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  Speaker 1: Sure Verti drive