Exchange-traded funds evolved from passive portfolio building blocks into clever tools that help streamline many parts of an advisor’s workflow in the few decades of their existence. The examples are endless, from target-date ETFs that can be all-in-one retirement solutions to derivative income ETFs that can replace structured notes for income. There are 351 ETF conversions that help defer taxes.
Asset managers have increasingly packaged more solution-oriented strategies inside the convenient ETF wrapper, including the concept of a bond ladder.
All Aboard the Bond Ladder
A traditional bond ladder invests in a portfolio of bonds with staggered maturity dates and holds them to maturity. For instance, a 10-year ladder of US Treasuries will have a portion of its bonds mature each year between 2026 and 2035. When some bonds mature in 2026, investors can either roll the principal into the next bucket of bonds maturing in 2036 or pocket the principal from matured bonds for any income needs.
If none of the bonds default, a bond ladder provides a predictable return path as its coupons and principal payments are predetermined. Bond ladders are similar to bond ETFs in that they still feel the impact of market movements should an investor choose to sell them.
The difference between a ladder of individual bonds and a bond fund is the way the principal investment is recovered. Known annual maturity dates built into the ladder prevent investors from having to sell to get their principal back, while they may have to sell a portion of their bond fund and realize some gain/loss to meet their needs. As such, a bond ladder can help investors achieve a smoother return profile amid market volatility. Investors nearing retirement can use bond ladders to reduce the impact of an unexpected market drawdown ruining their withdrawals.
From a financial planning perspective, bond ladders are useful tools for liability-matching. They create a predictable income stream for investors with known expenses (again assuming no default risk). Those worried about interest rate volatility can choose to lock in current rates with a bond ladder and use the coupon payments and principal from maturing bonds for expenses, such as a child’s college tuition.
Bond Ladders Versus Bond Ladder ETFs
A bond ladder is hardly a novel concept, but packaging it within an ETF is a relatively new innovation. Higher interest rates have revived interest in bond ladders in recent years. Investors poured over $46 billion into target-maturity ETFs, the precursor to bond ladder ETFs, over the trailing three years through July 2025. These funds own bonds maturing in a specific year and work as building blocks for a do-it-yourself bond ladder. Interested readers can refer to an article from our colleague Saraja Samant covering them in more detail.
The resurgence of target-maturity ETFs led to the introduction of all-in-one bond ladder ETFs. A handful of providers have jumped into the ring so far: WisdomTree, Global X, iShares, and, more recently, Northern Trust. Treasuries, Treasury Inflation-Protected Securities, and municipal bonds are popular underlying holdings, with iShares additionally offering corporate and high-yield ladder ETFs. Most of the current bond ladder ETFs use a rolling portfolio that reinvests the principal into the next ladder rung, which allows investors to lock in current yields and shields them from some interest rate volatility.
Ladder ETFs come with trade-offs that investors should consider. Ladder ETFs have a higher degree of certainty around their future payouts because their coupons and maturity dates are known. But they incur an opportunity cost. A ladder portfolio will hold on to bonds until they mature along with any principal from those that have matured until the next roll date. Meanwhile, a typical market-value-weighted index ETF sells out of maturing bonds a year before they mature, which provides them the opportunity to solidify any gains. When rates are falling, for instance, a bond ETF will reflect the rising bond values to a larger extent than a rolling ladder ETF. Investors nearing retirement might prefer the lower volatility from a bond ladder, but those with a longer investment horizon will likely find a nonladdered bond ETF more attractive. Ladder ETFs have other benefits. They can diversify away the risks of individual bonds better than a do-it-yourself bond ladder, and they can reduce trading costs. The diversification benefits will depend on the ETF in question. In most cases, ladder ETFs offer more breadth and are an improvement over a ladder of individual bonds for smaller investors.
Trading individual bonds can be an expensive endeavor for small investors, given their high minimum trade size and the lack of liquidity in many corners of the bond market. In contrast, an ETF’s large pool of money allows it to buy multiple bonds and buy them cheaply in larger lots. Most bond ladder ETFs currently charge a relatively small annual fee—less than 0.20% a year—though the added cost can even out the benefits for some investors.
Bond Ladder ETFs, But Make It Income
Northern Trust, on the other hand, recently launched a distributing ETF designed to match the duration of an investor’s liabilities or cash needs.
Instead of perpetually rolling the principal and extending the ladder’s maturity, the distributing ladder ETF will simply pay out the principal from maturing bonds every year on top of a monthly interest payment. Investors receive a predictable annual distribution over the length of the ladder. The ETF will liquidate once it reaches the end of the ladder’s specified maturity year.
The ETFs pay out interest monthly but gather the principal from maturing bonds for one annual payment date. The managers invest those principal payments from bonds maturing earlier in the year into Treasuries to keep up with inflation. Investors give up some flexibility. Given the ETFs’ fixed distribution schedule, investors cannot control the timing of these distributions. At the cost of flexibility, these ETFs can be a convenient solution to fund large expenses, such as a child’s college tuition or a 20-year retirement spending plan.
Northern Trust offers two variations of these distributing ladder ETFs: a municipal-bond series and a TIPS series. The municipal ladder ETFs will alleviate the tax burden of the income stream, while the TIPS distributing ladder can help keep up with inflation. Both series offer ETFs with specific maturity dates that increase in increments from 2030 through 2055.
It’s worth noting that the municipal ladder ETFs will face callable bond risk, which means the issuers may buy back the bonds before the stated maturity. This usually occurs when interest rates decline. Most municipal bonds come with embedded call options that allow issuers to buy them back once the bond has reached a certain age. Many call options can be exercised 10 years after a bond’s issuance and typically at the bond’s par value.
While municipal-bond ladders tend to enjoy higher coupons that compensate for the subsequent reinvestment risk, this can create hiccups for a ladder ETF’s income stream. Nonetheless, all municipal ladder portfolios face this risk, and the scale of the ETFs will allow them to reinvest the principal from called-away bonds more seamlessly.
Due Diligence Is Still Required
The regular income stream from these ETFs, combined with their tax and inflation advantages, can make them powerful tools. For advisors, these ETFs can simplify the process of matching their clients’ liabilities with distributions and free up time for them to spend on more complicated tasks. Ladder ETFs, whether rolling or distributing, are still just tools in an investor’s or advisor’s arsenal. They have their flaws, however, and likely will not replace a core fixed-income holding or an advisor’s job anytime soon.