Beyond individual bonds: Why target maturity ETFs may be a better way to build bond ladders

Higher yields and uncertainty around the path of interest rates have renewed advisor interest in bond ladder strategies designed to help generate more predictable income while helping manage reinvestment risk. By staggering maturities over time, ladders can help investors avoid reinvesting large portions of a portfolio at a single point in the rate cycle while maintaining visibility into future cash flows.

The diversification challenge in fixed income markets

Traditionally, advisors have implemented ladders using individual bonds. However, fixed income markets are significantly more fragmented than equity markets, making diversification more challenging than many investors appreciate.

For example, the S&P 500 provides exposure to approximately 500 of the largest US companies, represented by slightly more than 500 securities due to instances of multiple share classes (e.g., approximately 503 tickers today).¹ By contrast, in fixed income markets, corporate bonds are far more complex: a single issuer may have dozens of outstanding bonds across maturities, coupons, structures, and liquidity profiles. As a result, the Bloomberg U.S. Corporate Bond Index contains more than 8,000 securities across many sectors and hundreds of issuers, highlighting both the breadth of the opportunity set—and the challenge of accessing it efficiently.²

Portfolio size constraints ladder diversification in bond ladders

This fragmentation introduces practical constraints when constructing individual bond ladders. Consider an investor with a $100,000 fixed income allocation building a five-year ladder. An equal-weight approach would allocate $20,000 to each maturity year, which in practice may result in only a small number of bonds within each rung.

This approach can increase issuer concentration risk while limiting sector diversification. In addition, constructing and maintaining the ladder requires multiple trades across maturities, introducing bid-ask spreads and reinvestment costs that can further reduce overall efficiency, particularly for smaller portfolios.

In fact, portfolio size directly impacts the ability to achieve meaningful diversification when building bond ladders with individual investment‑grade corporate bonds. For example, reaching exposure to approximately 400 bonds may require roughly $800,000 of capital given minimum trade sizes (Figure 1).³

By contrast, target maturity bond ETF strategies typically hold hundreds of securities, with each fund often averaging around 470 bonds across a broad issuer base.⁴ And this level of diversification can be accessed at the cost of a single ETF share, significantly lowering the barrier to entry while also improving cost efficiency through reduced trading and ongoing maintenance requirements.

Why diversification matters for risk-adjusted outcomes

Replicating this level of diversification with individual bonds can be difficult in practice. For many portfolios, particularly those below several million dollars, the number of securities that can be held within each maturity rung is inherently limited. As a result, ladders constructed with individual bonds may remain concentrated in a small number of issuers or sectors, increasing exposure to idiosyncratic credit risk.

Increasing diversification, measured through the addition of sectors, can improve portfolio outcomes. As the number of sectors increases, portfolio volatility declines while yield per unit of volatility improves (Figure 2). This underscores a key dynamic for investment-grade corporate portfolios: diversification plays a dual role by reducing concentration risk and improving the efficiency of income generation.

However, achieving this level of diversification through individual securities remains challenging, particularly in smaller portfolios. In practical terms, achieving a diversification profile comparable to broadly diversified target maturity strategies typically requires a larger investment base—highlighting a structural limitation of traditional laddering approaches.

Implementation complexity complicates laddering—ETFs offer a solution

Implementation can also be resource-intensive—limiting the ability to scale bond ladder strategies across client portfolios.

Building and maintaining individual bond ladders often requires advisors to source securities, navigate varying liquidity conditions, monitor credit quality, reinvest proceeds as bonds mature, and oversee portfolios across multiple client accounts.

These operational demands can make scaling the strategy across a broader client base more difficult. In this context, ETFs offer a potential evolution in how laddering strategies are implemented. Importantly, the State Street MyIncome suite represents the first and only actively managed corporate bond target maturity ETF lineup, combining the structural benefits of ETFs with active security selection.

By providing diversified exposure to fixed income sectors in a single vehicle, ETFs can help address the concentration risks inherent in individual bond ladders while improving transparency and liquidity. At the same time, their structure allows for more efficient portfolio construction and ongoing maintenance, making it easier to implement laddering concepts across a broader set of client portfolios.

Rather than selecting and managing individual securities, advisors can use ETFs to construct ladder-like exposures across maturities, balancing potential income generation, diversification, and operational efficiency within a scalable framework. This approach aligns with the broader industry shift toward model-based and centrally managed portfolio construction.

ETF laddering expands diversification across sectors and credit

The sector and credit rating composition of the sample ladder constructed using MyIncome ETFs spans a wide range of sectors and credit ratings demonstrating the depth of diversification achieved within the structure (Figure 3). This is a key advantage of ETF based laddering as each rung provides exposure to a broad cross section of issuers and sectors, reducing reliance on individual credits and mitigating issuer specific risk.

To further illustrate the practical limitations of individual bond laddering, we construct an illustrative portfolio using the 10 largest bonds within each maturity rung, weighted by market value. Even under this more optimized approach, the resulting ladder remains concentrated, with sector exposures skewed toward a narrow subset of issuers. This reflects a structural constraint of individual bond implementation, where achieving broad sector diversification within each rung is limited by index composition, security availability, and portfolio size.

The portfolio exhibits a notable tilt toward select sectors, underscoring how even a rules-based approach to selecting larger, more liquid bonds can result in limited diversification across the opportunity set (Figure 4).

Precision in managing yield and duration with State Street MyIncome corporate bond ETFs

Compared to a traditional core bond allocation, a 5 year ladder constructed using State Street MyIncome corporate bond ETFs delivers comparable yield with significantly lower duration, resulting in a higher risk-adjusted yield (Figure 5). This reflects the ability of target maturity ETFs to isolate specific points along the yield curve, allowing advisors to manage interest rate exposure more precisely while maintaining potential income.

Importantly, this approach also enables a more scalable and consistent implementation across client portfolios. When ladders are constructed using individual bonds, differences in trade timing, security selection, and bond availability can lead to varying exposures, risks, and performance outcomes across accounts, even when following the same general strategy.

In comparison, target maturity ETFs provide a standardized set of underlying exposures, allowing advisors to implement a single, repeatable process across clients, helping to harmonize risk profiles and outcomes while improving scalability.

A 5-year MyIncome bond ladder provides diversified exposure to investment-grade corporate bonds across industrial, financial, and utility sectors within a single, scalable structure with active portfolio construction within each maturity year supporting more efficient issuer selection and risk management.

Through this approach, investors gain access to a broad fixed income allocation spanning more than 900 securities across 365 issuers,⁵ helping to mitigate issuer-specific risk and enhance overall portfolio resilience. By contrast, replicating a similar level of diversification using individual bonds would typically require significantly greater capital, as well as higher operational effort and ongoing portfolio management.

A more scalable approach to implementing bond ladders

Ultimately, while traditional bond ladders remain a familiar framework for managing income and reinvestment risk, their practical limitations have become increasingly apparent in today’s fragmented fixed income markets.

ETFs offer a more scalable and efficient approach, delivering diversified exposure, operational simplicity, and greater precision in managing duration and cash flows. As portfolio construction continues to evolve, ETF-based laddering provides a modern solution that can help advisors implement consistent, risk-aware income strategies across a wider range of client portfolios.

Within this approach, actively managed target maturity ETFs—such as the State Street MyIncome suite—can further enhance implementation by combining diversified exposure with active issuer selection across each maturity year.