Ep 20 - Essential Bond ETF Strategies for Providing Income

In this episode of the EnRich Your Life podcast, host Rich Leimgruber sits down with Marcel Benjamin, Fixed Income Strategist at State Street Investment Management, to discuss the essential shift in your financial strategy as you move from your wealth accumulation (growth) phase into retirement (income).
Have you spent years building up your savings and are now wondering how to turn that nest egg into a reliable paycheck? This episode is for you!

Marcel breaks down the role of bonds and introduces an innovative approach to managing your income portfolio: bond ladder Exchange-Traded Funds (ETFs)

What You'll Learn:

Bonds Made Simple: Get a clear, layman's explanation of what a bond is and how it differs from owning stocks.

The Power of Bond Ladders: Discover how staggering the maturity dates of your bonds (a "bond ladder") can help reduce the risk of having to reinvest all your money when interest rates are low (reinvestment risk).

A Modern Solution: ETF Bond Ladders: Learn about using low-cost, actively managed ETFs that are specifically designed to mature like individual bonds. This approach offers the diversification and efficiency of ETFs, avoiding the high costs and lack of transparency often found when trading individual bonds.

Matching Your Money to Your Life: Understand how these "stated maturity" ETFs can be used for Asset-Liability Matching (ALM), tips on aligning your investments with future cash needs, like a child's college tuition, buying a second home, or simply creating a planned retirement income stream.

Corporate vs. Municipal Bonds: Explore the trade-offs between higher-yielding corporate bonds and the potential tax benefits of state and local municipal bonds.

Whether you're looking to create a more tax-aware income stream or simply seeking a different path for a portion of your wealth, this episode is full of strategic insights you can use immediately.

Filmed and recorded at Studio on the Avenue/LMC Media
Mamaroneck, NY
https://lmcmedia.org/
Produced and Edited by Vekterly
https://www.vekterly.com/

Disclaimer: This podcast is for informational and educational purposes only and should not be considered as financial advice, a recommendation for any specific investment, strategy, or financial decision, or legal advice. By engaging with this material, you acknowledge and agree with its intended purpose. Any examples provided are hypothetical and for illustration purposes only. Neither Rich Leimgruber, the EnRich Your Life Podcast, nor its representatives are advising or suggesting any specific action or decision. Before making any financial, legal, or tax decisions, individuals should consult their own financial advisor, accountant, legal professional, or other qualified professional before making financial decisions. All opinions expressed are those of the host and guests and do not reflect the views of any affiliated financial institutions. The views shared may not be suitable for every individual or situation. Past performance is not indicative of future results, and all investments carry risk. Please note that any strategies discussed may not be suitable for all investors, and the appropriateness of any specific investment or strategy will depend on individual circumstances.

Transcript

EnRich Your Life Podcast – Episode 20 Essential Bond ETF Strategies for Providing Income

[00:00:00] Intro Speaker: This is EnRich Your Life, a podcast about financial health, all things investing, life planning, and smart decisions with Richard Leimgruber.
[00:00:11] Rich L: Hello and welcome to Enrich Your Life podcast. Uh, we are having another episode today. On things that will enrich your life. Um, this one is going to be more on, uh, transitioning your wealth, uh, from a growth phase into an income phase. A lot of times I work with clients for most of their lives worrying about how to grow their portfolio so that they have enough money that's saved, for when they need it.
[00:00:36] In retirement. And once we get to a certain point where clients have decided that they're looking to retire, we have to start looking at strategies to transition those growth portfolios into an income portfolio. So today we're gonna be talking, about the role of using a bond ladder ETFs, both corporate and municipal bonds, uh, using [00:01:00] low cost ETFs that are actively managed and designed.
[00:01:05] To mature like individual bonds. So whether you're looking to reduce equity exposure, or simply create a more tax-aware income, this episode offers strategic insights that you can use immediately in your own portfolio. Today I am joined by, Marcel Benjamin. He's the fixed income strategist at State Street Investment Management.
[00:01:26] Marcel specializes in helping advisors and investors navigate today's bond markets with precision. He has broad expertise across the fixed income spectrum and other asset classes, and his proven strengths include defining asset allocation plans, identifying and implementing investment strategies, as well as portfolio construction.
[00:01:47] He has two bachelor degrees, one from the University of Pennsylvania and an MBA from Columbia Business School. And he's also a CFA charter holder, and without further ado, welcome Marcel, and thanks for [00:02:00] joining us today. 
[00:02:00] Marcel B: Thank you. Thank you very much for having me.
[00:02:02] Rich L: I think this is a, a crucial conversation for those who are. About to, you know, take that next step in life. And they've been saving their whole lives and they've been dealing with market fluctuations.
[00:02:15] And part of everyone's portfolio, depending on your risk tolerance, should really have some bonds in it, we'll say.
[00:02:22] But where you need to transition into a lot more bonds and
[00:02:26] less growth and stocks is when it, it comes time to retirement. So, you know, first of all, tell us. A little bit about how you got to where you are today, uh, what's your story? 
[00:02:37] Marcel B: Yeah, thanks, Rich. Yeah, so, um, I've worked for State Street Investment Management for almost 10 years now.
[00:02:42] Okay. 
[00:02:42] Um, out of college I started at BlackRock, which was, uh, a much smaller firm back then than it is now. And I got to cut my teeth and learn everything there is to know about bonds, uh, working there. Um, I did some risk management type work and consulting, and then I really wanted to get more involved in the [00:03:00] investment process, become a.
[00:03:01] Portfolio manager and a trader, which is an opportunity I got at my next, uh, stop, which was at Guggenheim Partners, um, which is a pretty large asset. Yeah. Not asset asset management firm. Um, so there I got to trade bonds and really get involved in the investment decision process and learn, um, even more about the bond markets.
[00:03:18] And, um, I've also worked at an insurance company, Swiss Re. And, uh, I've really come at bonds from a lot of different angles and I think that really lends itself, that experience set lends itself well to what I do today, which is working with clients of all stripes from financial advisors up to. Major institutions all around the world and helping them with our bond ETFs, um, getting comfortable with the bond markets and, and implementing our bond ETFs in their portfolios.
[00:03:46] And we've got 55 bond ETFs in the US with almost 170 billion. Yeah. Um, as a, as a subset of what is a five plus trillion dollar asset management firm, State Street Investment Management. [00:04:00] And State Street Investment Management is part of State Street Corporation, which is a custodial bank, and they custody almost 50 trillion in assets.
[00:04:05] Who. 
[00:04:07] Rich L: Great. Yeah, it's, it's always good to have a partner like State Street. I think ultimately trust comes from dealing with other investment companies that have been around and, and know what, what happens in certain market environments.
[00:04:18] Marcel B: Yeah. Uh, we have, as I said, we have 5 trillion, over 5 trillion of assets under management. Within that, there's. 1.7 trillion that are ETFs that are in the ETF wrapper, which is, um, you know, a type of vehicle, a type of investment vehicle. Sure. And then within that. The, the, the bond ETFs in the US are about 170 billion.
[00:04:36] So it's important to just get a sense of who we are, how big we are, where our presence is in the market. And we launched SPY back in 1993,
[00:04:44] Rich L: for some listeners, they might know what a bond is.
[00:04:46] Yep. And some listeners. They have no idea. Right. So, uh, there are two, three major asset classes, stocks, bonds, and cash. Mm-hmm. Right. So normally, uh, growth portfolios, you have stocks [00:05:00] which are owning companies. Can you explain a little bit about a bond, what a bond is? 
[00:05:05] Marcel B: Yeah. So stocks are typically an ownership stake in a company.
[00:05:08] Mm-hmm. And bonds are, I would think about them as a loan. Mm-hmm. And, um, you can make that loan to any type of entity. Um, I think the simplest, or the one that they often call risk free is, is a loan to the United States Treasury. To the US government. Um, so typically, uh, a treasury bond has, um, fixed and known maturity and then pays a fixed coupon.
[00:05:34] Um, in this case, the coupons are paid twice a year. That's your interest rate. Um, but of course there are lots of different, um. Flavors of bonds. You can have bonds that pay every month. You can have bonds where the coupon floats. You can have bonds that have different maturities, um, or different, uh, payments along that maturity schedule.
[00:05:54] And you can have bonds that are secured, meaning that there's a, an asset that is [00:06:00] behind that bond that's backing it. Um, but I think the simplest is to think about like a loan or most, um, folks have, you know, have invested in a CD. And, uh, a CD is a, in effect is a type of bond. It's a loan that you are making to a bank, right?
[00:06:15] The bank is gonna pay you back. So, um, for the purposes of, uh, our conversation today, we're gonna be talking about corporate bonds and municipals. Yeah. So on the corporate side. You're making, um, a loan, you're giving money to a corporation, and that corporation is paying you a certain interest rate, certain fixed coupon, again, typically twice a year, semi-annual, and the maturity is usually set.
[00:06:40] If there may be a call option where the loan, where the issuer can have the ability to pay you back sooner, for example. Um, and when we talk about these corporations, we're talking about investment grade corporations. That means companies that are considered highly rated, um, and in [00:07:00] good financial shape.
[00:07:01] And I contrast that with below investment grade. Which is also known as high yield. Back in the day, it used to be called junk bonds. Yep. And those are companies that are, um, not necessarily bad, but not as mature in their, uh, life, not as, you know, they may have more debt, they may be struggling, or they may be in the early stages in growing.
[00:07:23] And I think a good example of that, we were just looking at this the other day. Is Netflix. Netflix issued bonds at one point that were below investment grade rated, and those bonds have been subsequently upgraded and now are almost the highest quality as Netflix benefited from the COVID boom and just general growth and mature maturing in its business.
[00:07:44] So that's one example. That's great. And then, and then the municipals, those are loans that you're making to state local authorities, sometimes gen what we call general obligations, which are. Bonds that, you know, can just get paid back based on [00:08:00] taxes or some sort of revenue bond. Maybe a bond issued by a toll road or a bridge.
[00:08:05] And I know I'm kind of jumping the shark here a little bit. No, you're doing great. I, but I just wanted to, I might, I'm like, this is great. I just wanted to kind of frame the conversation. 
[00:08:11] Rich L: Sure, sure. And, and so that, that's where I wanted to go with this conversation too, is that there are different bonds, right?
[00:08:16] And, and some of the bonds, um, you. For some reason, some, some bonds have higher interest rates and ha some have lower, and I always relate it back to risk, right? The bonds that are paying higher are the ones that are less rated, like you said, net like Netflix probably was back in the day. And in order for them to get somebody to want to invest or to, to loan them that money with a lower rating, they have to offer a higher interest rate than maybe a bigger, more mature company that you know, you're gonna get your coupons, you know you're gonna get your money back.
[00:08:47] And because they're highly rated. If they're not gonna be paying you as much. Right. So, absolutely. I think, can you talk us a little bit about what that rating process looks like? 
[00:08:57] Marcel B: Basically, um, there [00:09:00] are three major rating agencies. Moody's. Yep. S&P or Standard and Poors and Fitch. And, um, if you are any type of issuer and you want to have your bonds rated, you will pay a fee to those rating agencies, one or more of them.
[00:09:18] They will assess the credit worthiness of that bond of you as an issuer of that bond to the extent that there's some collateral or asset that you've put in to, to secure that bond that might be higher rated. Um, so it depends on the bond type and you as an issuer and, um, and they'll assign a rating to it.
[00:09:39] And typically if you get the bond rated. You are broadening the potential investor base because many investors cannot invest in bonds that are unrated. Mm-hmm. But there are very fine bonds that are unrated that just, they decided they didn't necessarily need a rating to issue that. Um, and typically these rating agencies also have access to [00:10:00] information.
[00:10:00] About you as a company or an issuer that isn't public. So there may be an aspect where they have information that they've gotten from you as the issuer that helps them make that decision that it isn't necessarily public. So they're not just reading your. Financial filings, they have a little bit more information.
[00:10:18] Um,
[00:10:18] Rich L: so they get to go in and talk to the CEO and find out what's happening with the company. And yeah, I'm 
[00:10:23] Marcel B: not, I'm not super familiar with their process. Right. Um, but they've done a good job. They've been around since, you know, for 50 plus years. Um, you know, over the years there's maybe been some stumbles or areas where they've been criticized or certain, you know, issues along the way.
[00:10:37] But especially when it comes to rating corporations and municipals, um, you know, they've done a, they've done a great job of, uh, you know, those ratings are, are pretty worthwhile. 
[00:10:46] Rich L: And before you mentioned the difference between, uh, a municipal bond and a corporate bond. Uh, there, there's advantages to having corporate bonds, you get a higher yield.
[00:10:55] That's right. But then there's also advantages to a municipal bond 
[00:10:58] Marcel B: so if you're a, a [00:11:00] corporation, you typically will, will pay a spread or basically a higher coupon, uh, or interest rate, then some reference, um, which in this case, we'll call it the US Treasury.
[00:11:13] So if you want to issue a 10 year corporate bond, you're a corporation, you wanna borrow. A billion dollars for 10 years. And in terms of determining what the coupon is going to be on that bond, it's going to be set off of what we call a benchmark. A base rate, A reference rate, and typically that'll be the 10 year treasury.
[00:11:32] So, okay, the 10 year treasury is borrowing today, I don't know. Let's say it's for and a quarter today, 
[00:11:38] right? 
[00:11:38] And you are IBM or GE, or pick a company, a blue chip company you'll borrow at. Five and a quarter, maybe one percentage point over that. So that's how you think about the incremental risk and reward of investing in a corporation investment grade.
[00:11:57] Now, if you're below investment grade, it might be three [00:12:00] points over that treasury. Instead of five and a quarter, you'll pay seven and a quarter. Got it. Um, so that's kind of how that set. Based on what the market will bear, what investors think. It's the credit worthiness is, and that will vary by industry, by rating, by maturity.
[00:12:14] If, uh, if you wanna borrow for 10 years, you might pay a different rate than if you wanna borrow for five years or two years. Especially when it comes to those below investment grade companies, they actually typically can't borrow beyond, you know, 10 years, for example, because you don't necessarily wanna lend money for 30 years to a company that may have, you know.
[00:12:32] Shaky finances or you're just, you don't have visibility into that company. And if you think about companies that were really huge 30 years ago Yeah, a lot of them are not anymore. And, and vice versa. Right. Um, now a, a municipal typically has a, a tax benefit. And so the income, the interest that you get from a municipal, just generally speaking is tax exempt.
[00:12:55] Now there's, there's some nuance there. Is it. Federal tax [00:13:00] exempt versus state tax exempt. And what kind of borrower is it? Um, I live in New York. We're shooting this here in the state of New York. If you buy a tax free or tax exempt New York municipal bond, then you shouldn't have to pay federal or state taxes.
[00:13:19] And of course, this is subject to, you know, I don't wanna make any blanket statement here. Sure. You know, I'm, and then we're not providing tax advice, so make sure that you. Check with your, with your tax expert, but you shouldn't have to pay any state or income or federal income tax on the interest that you get, um, from that New York, uh, tax-free municipal bond.
[00:13:42] Now, if you buy a Michigan bond, you don't have to pay federal taxes, but you have to pay New York State taxes on that income. And then there's all, you know, sorts of wrinkles about AMT and. Um, you know, so there's all different types of flavor. There's also taxable munis. There are municipal bonds out there that are just [00:14:00] like corporate bonds you have to pay, uh, regular tax.
[00:14:03] So, um, there is a lot of nuance and, and complexity around both of these sectors. 
[00:14:09] Rich L: Right. And, and what I would remind our listeners is that if you are looking or interested in a tax free or municipal bond, be prepared to get less of a yield because. We always, as a financial advisor, will determine what the tax equivalent yield is based upon what the investors' tax brackets are.
[00:14:30] If you're in a higher tax bracket, you might be further inclined to use tax, uh, tax free bonds versus being in a lower tax bracket because just the amount of savings that you can make. Being in the higher tax bracket and not having to pay tax could actually yield you higher than a corporate bond, correct?
[00:14:48] Marcel B: Yeah, that's right. I mean, um, along the way over the years, I remember at one point, um, hearing about some, uh, investors in Asia who were buying tax-free munis in the US and it was [00:15:00] interesting because they didn't get any of the tax benefit, and as you just said, the yield was a lot lower. But what's also interesting about municipal bonds is that they tend to have extremely low.
[00:15:09] Default rates, um, distressed rates. That's not to say that there are, there is not, there's none out there. But actually we have, um, a slide in one of our presentations and we, you know, we partner with Nuveen, who's really an expert in the municipal space. Sure. And they show that, um, and I'm not gonna get into numbers, but basically AAA corporate has a similar default rate as a single, a municipal.
[00:15:35] And those are in the basis points. They're all extremely low. But the ratings assigned to municipal bonds, um, tend to actually even, you know, be more favorable than, than the experience. So municipals just really, and of course municipals don't typically have like a chapter 11 proceeding like a corporation have where they would file for bankruptcy and liquidate.
[00:15:57] So it's just a different kind of asset class in [00:16:00] that respect. But, um, like you said, you get a lower yield and then to think about and compare it to a corporate bond. You obviously have to think about the risk, the rating and all those things, but if you're just thinking about the yields, you have to make an adjustment.
[00:16:12] And we generally just, um, for the sake of, you know, our work, we assume the highest tax bracket, but that's a very individual and specific, um, calculation. And as you might be somebody who, you know, you're in the highest tax bracket one year and then you know you're not working for six months the next, and now that in the next year you're in a different tax bracket.
[00:16:31] Sure, sure. So that's important to work with your advisor. Or your tax specialist to, to get a better understanding of where you fall, which tax bracket, and what those tax adjusted or tax equivalent yields look like for you. 
[00:16:44] Rich L: And so we're gonna transition a little bit. We've been talking a lot about bonds, which is, but, but there's, you could buy individual bonds, right?
[00:16:51] You go out and you buy a bond and you hold it to maturity. Um, back when I first started, 26 years ago. You could buy a uni, a, a mutual fund of bonds, right? [00:17:00] And then all of a sudden these ETFs came around. And the ETFs are very similar with mutual funds, but they're a little bit more liquid. Um, there's a, we, we've had a whole podcast on the difference between mutual funds and ETFs, you guys came up with another, uh, I guess product mm-hmm. Which is using ETFs with bond ladders. Mm-hmm. So we haven't really talked about bond ladders yet, but you could do that with individual bonds. Yeah. But now you can use that with actually ETFs, right? That's right. So, so tell us a little bit about what a bond ladder is and, and how, how an ETF bond ladder would be different from an individual bond ladder.
[00:17:34] Yeah. 
[00:17:35] Marcel B: So a bond ladder is something that, um, has been around for a long time and, um, really is applies to individual bonds. And the, the notion there is that, um, you are buying bonds with staggered maturities, sort of like rungs in a ladder. And there's no, you know, prescribed method to do it. But let's just take, for example, treasury bonds.[00:18:00] 
[00:18:00] You might build a treasury bond ladder by buying a one year treasury bond, a two year treasury bond, a three year and so on out to 10 years. Or you might do it differently. You might do a two year, a four year out to 20 years, or maybe, you know, just five rungs in that ladder out to 10 years, 2, 4, 6, 8, 10.
[00:18:18] There's different ways to build it, but the, the concept is that as those bonds. Roll down, meaning as they approach maturity, you have a portfolio that's diversified by maturity. And when one of those bonds matures, you will have to go out and reinvest and buy the next rung of the ladder. Um, the idea is that it really mitigates what we call reinvestment risk.
[00:18:48] Um, if you had bought, uh. A five year bond in 2015, a five year treasury bond instead of building one of these ladders, and then you got to 2020 and the [00:19:00] Fed took the in interest rates down to zero in the Agg or get bond index, which is what, you know, the s, what we call the S&P 500 of bonds, right? The most popular benchmark was yielding only 1%.
[00:19:12] Then you'd be up the creek without a paddle because all of a sudden your whole bond portfolio is coming due. You'd have to reinvest that at at 1% because, or, or whatever. You know, rates were very, very low. Yep. But if you had built a ladder and you only had say, 10 or 20% of your ladder maturing, yes, you would still have the same issue, but it wouldn't apply to your whole portfolio.
[00:19:34] So the idea is to stagger it. S uh, you, you're, you're, you know, to build this ladder, to have different rungs maturing at different points in time, to have to only reinvest a certain amount every year or every two years, or every 18 months, however you build this. And so what it does is it mitigates that reinvestment risk.
[00:19:53] And reinvestment risk is really, um, the, the risk of having to reinvest at a much lower rate, um,
[00:19:59] Rich L: in the [00:20:00] future. 
[00:20:00] Marcel B: In the future. That's right. Right. Yeah. And so, um, that's how we think about bond ladders. Uh, investors, advisors really like them. Um, the bonds still have what we call duration, which is the main risk with bonds, which is price sensitivity.
[00:20:17] When interest rates in the market go up, your price goes down for a typical fixed rate bond. Um, and so that interest rate risk still exists, but there's sort of this. Warm and fuzzy feeling this sort of placated feeling about the fact that even though that interest rate risk exists and the prices of your bonds have fallen, you know that you're getting that maturity at a certain point in time.
[00:20:42] And of course, I, I said treasury bonds because those are the ones that we know, you know, with almost a hundred percent certainty that you're gonna get your money back. So part of building these bond ladders is, you know, the assumption that, um, that they are performing, that they're high quality and that they're going to mature.
[00:20:58] Time and pay their coupons on [00:21:00] time. 
[00:21:00] Rich L: For a financial advisor, that's important because a lot of times clients can't see the future. They can only see what's happening today. And so if you can define an outcome, right, when say, you know, if you're buying these treasury bonds in 10 years from now with the risk free US government bonds coming due.
[00:21:18] There's a high probability that you're gonna get all your money back and you could depend on that. And that's comforting to clients. That gives them the ability to plan out to the future. And that's, that's why I think, you know, using bond ladders is extremely important when it comes to, you know, investing the client's percentage of their portfolio into bonds.
[00:21:36] So, yeah. 
[00:21:36] Marcel B: Yeah, absolutely. 
[00:21:37] And there's a concept called pull to par, which is that as a bond approaches its maturity. Again, assuming that it's, it's performing, its a regular way bond, the price starts to. Get closer and closer to par. And I think the contrast there is with a bond fund, um, which is gonna be much more diversified, it's gonna have a lot of different bonds for different maturities.
[00:21:59] Um, if [00:22:00] interest rates go up, the price of that bond fund goes down and you see a loss in your, on your statement. Um, so, so these bond ladders have been popular for a long time and then, um, instead of, but there, but there are some inefficiencies for. Building your own bond ladder and that that can be, first of all, that these bond ladders are not as diversified.
[00:22:23] And we talked about treasuries, but now assume you're building one with corporate bonds. You want a certain number of different issuers in, uh, if you were to build a corporate bond ladder, and typically when you build one with just 5, 10, 20 bonds, it's really not well diversified, right? So if you are able to.
[00:22:43] Replicate this type of experience, this bond ladder with an ETF. You'll get much more diversification. I'll talk about how those ETFs work in a second. Right? In addition, um, ETFs trade on the exchange and meaning they trade like stocks. They [00:23:00] typically have very tight bid offers. Um, you contrast that with individual bonds.
[00:23:06] There's some pretty large markups or pay up when you're trying to trade them yourself. So we think that this is a more efficient, uh, way of implementing and executing diversification and, um. Lower transaction or trading costs. 
[00:23:24] Rich L: Right. So what are you, I think what you're saying there is if I were to have a bond ladder and let's just say it's a hundred thousand and I bought 10,000 of 10 bonds.
[00:23:31] Yep. When I go to price out those bonds as an advisor. I'm buying one bond and the trading desk goes, you know, goes and checks Who's willing to sell you those bonds? And there's typically a higher cost to doing it that way versus an institution where they're going out and buying millions of dollars of bonds at a time.
[00:23:52] Right. Is that 
[00:23:52] Marcel B: Absolutely. And bonds don't trade on an exchange. Like ETFs are like stocks, right? So there's less price transparency. [00:24:00] Um, it's a much more fragmented market than stocks. If you think about, I mentioned earlier, IBM or GE, those companies have one stock. IBM is a ticker. GE is a ticker. A trades on the exchange.
[00:24:13] They can have tens, hundreds, thousands of bonds. I mean, you know, and so, um. That that bond market is more fragmented, it can be less liquid than the stocks or, or stock market or the, or the ETF, um, in terms of that bid offer and, and those transaction costs. Um, and. Um, there are other benefits to the ETFs.
[00:24:38] The, the, the way that we launched these, this suite, which is called the My Income Suite, is we've also, um, decided to approach it with an active management lens. And there are some other funds that are doing this in the market that are passive or. Ly manager indexed. So the active management, uh, component is also important because, you know that, um, [00:25:00] the, the portfolio manager, the investment advisor is not necessarily just blindly following an index in this case, but is also adding some value with the active management.
[00:25:09] And I could talk a little bit about that. 
[00:25:10] Rich L: Yeah, I was gonna say, let's, let's dig a little bit further into that. Yeah. Because I think it's important, and again, we've always associated on this podcast that indexing is a very. Efficient, cheap way of, of buying certain investments. Right. But you're buying the index, so you're buying the whole 500 stocks of the S&P, the aggregate, you're buying a whole bunch of different bonds.
[00:25:33] Active is more where you guys as a company and a portfolio manager going in and picking certain bonds, right? 
[00:25:41] Marcel B: Yeah. So, um. The active aspect allows us to address certain inefficiencies in those index products and also take advantage of certain opportunities with the goal of adding more, um, performance income yield for, for our [00:26:00] investors.
[00:26:00] Um, so if you think about, for example, in April, there was a dislocation in the market. The fundamental picture hadn't really changed very dramatically. For most of these bonds that are in some of our funds. Our portfolio managers were able to go out and buy certain bonds, maybe add to existing bonds, 50 to 50 basis points, you know, half a percentage point higher, and take advantage of that dislocation.
[00:26:25] The index is really not sup. The index managers are really not supposed to do that. They just hold the bonds in the index and the proportion that are in their benchmark. And continue to just match that performance. That's one example. Another example with these funds, and I should say that the funds all have, uh, a year in the, in the name of the fund and Okay.
[00:26:45] What that year represents is that in, in, on or around mid-December of the year, that is in the name of the fund, that's when the fund is going to, is expected to liquidate. 
[00:26:54] Okay? 
[00:26:55] And so that's why these funds, um, for all intents and purposes are kind of like [00:27:00] bonds in the sense that they mature or liquidate.
[00:27:03] Most ETFs in the market. Most mutual funds, for example, are evergreen forever, right? Yeah. They have no, they don't have that feature. They don't anticipate ever liquidating or maturing. So this is a category of ETFs called stated maturity ETFs. Target maturity ETFs define maturity ETFs that have typically a year in the name of the fund, and that is the year when you know, around the end of the year, the fund will basically.
[00:27:33] Liquidate, you know, turn into cash, give you your money back. In the form of basically like a sale. 
[00:27:41] Rich L: So let's, let's talk a little about the advantage of that. Yeah. Because a lot of times there are risks to bonds and one of those risks is interest rate risk. 
[00:27:49] Marcel B: Yeah. 
[00:27:49] Rich L: And you mentioned earlier that when interest rates are rising, bonds usually come down in value.
[00:27:54] And so you could be an owner of a mutual fund that has bonds in their evergreen [00:28:00] forever. And the bonds might be losing value and, and you're questioning like, well, why are these losing value if, you know, um, in bonds, and it has to do with the interest rates. But with these fixed dated maturities that, you know, they're coming to maturity, does that mitigate some of that interest rate risk because you know they're coming 
[00:28:20] Marcel B: Yeah. yeah. I, I, I think the answer there is yes and no. Okay. So the no aspect is the fact that if you invest in, uh. Stated maturity fund that matures, say in 2034, um, eight, nine years away from today. Um, most of that portfolio will consist of bonds that are maturing in that year. 
[00:28:44] Mm-hmm. 
[00:28:44] And those bonds have about, if they're nine year bonds, they have about seven years of duration.
[00:28:50] That means if interest rates rise a hundred basis 1%, if the 10 year goes from four and a quarter to five and a quarter. You'll lose about seven percentage points in, in [00:29:00] price. 
[00:29:00] Okay. 
[00:29:00] Um, you'll still have income that's gonna offset that along the way, so that'll dampen that and, and mitigate that. Um, but that's a, a short term loss.
[00:29:10] And, um, we have that concept that I mentioned earlier, pulled to par, where over time those bonds are all expected to mature. At par in that year, 2034, for example. Mm-hmm. Um, so you can't eliminate interest rate risk through these products, but it does give you the comfort that you're gonna have that pull to par, that the price of the fund is going to build back up.
[00:29:37] And to that maturity date, it should get close to that price, and you should, um, recover that as the bond approaches maturity 
[00:29:45] Rich L: So when we're talking about these ETFs and the, the, the stated maturity date, ETFs, more likely. Would it make sense to have a bond, uh, ETF that's [00:30:00] maturing at a certain point in somebody's life?
[00:30:02] Like a retirement? Yeah. Uh, or, you know, uh, how do you pick those dates? Yeah. Is it just basically every other year or. What, what do you typically,
[00:30:11] Marcel B: There's many uses of them. Okay. So we start with the concept of bond ladders. Mm-hmm. You could use these funds to build your own bond ladder and instead of you, you know, just having 10 bonds, now you have 10 funds and each of those funds is well diversified and you're getting, uh, much better liquidity.
[00:30:26] Right. But you might decide that, you know, there's other reasons and that you don't necessarily need to build a bond ladder, but maybe you know that you've got some money sitting there. In three or four years, you're gonna need that money. You're gonna buy a boat, you're gonna, you, you know, your child's gonna start college, you're gonna buy a second home, whatever it is.
[00:30:45] And so you can match that, what we'll call a liability, that your need for cash at some point in the future. A future obligation, right? A future obligation with an investment today into one of these funds, knowing that you're gonna get, [00:31:00] um. With reasonable certainty, some range of, of that yield. And we have a, a tool on our website, a calculator tool that will show you what the yield is today.
[00:31:10] Uh, it's not a guaranteed yield, but it's, it's, it's similar to what you should expect over the period from today till that maturity. Um, and then that fund is going to liquidate, uh, uh, like I said, on or around mid-December of that year. That's in the name of the fund. So it is a way, uh, in insurance, in the insurance business or in in pensions, we call that ALM Asset Liability Matching
[00:31:34] So you're got it. You're investing in asset that matches a liability, um, in the future. And. You can match up those, those needs for, for cash, those cashflow needs that you have. Great. Um, you might also just say, look, I'm, I'm uncomfortable with the market, but I don't want to just put my money in a, in a T Bill fund or a money market fund.
[00:31:53] I want to, I feel comfortable over the next two years, I'm gonna invest in the 2027 version. I just wanna invest for the next [00:32:00] two years. I'm gonna get my money back in, in two years, and then I'll. Reevaluate. So it is, um, you know, picking your spots or maybe you say, I wanna buy the one with the highest yield.
[00:32:10] Yeah, I think so. There's different ways to approach the many use cases for these funds. 
[00:32:13] Rich L: Yeah. And, and, and, you know, there's, there's a lot. Not only do you have your ETFs, but there's other companies out there with something similar obviously that may not be active. But what I would say to an an investor is that use your advisor to.
[00:32:27] Go out and search for what the purpose of you buying that bond to begin with is for, those ETF funds that you have, do they have based upon, I guess, the credit quality of those bonds too?
[00:32:40] Or are they just a combination of. High credit, lower credit, intermediate credit, and vice versa. And who, how do you select those? 
[00:32:47] Marcel B: Yeah. So each of the funds that we ha have that are actively managed also have a reference benchmark or index that they're thinking about as they're constructing their portfolio and that they're measuring themselves too.[00:33:00] 
[00:33:00] Um, for the investment grade funds, the corporate funds, that is an investment grade benchmark. 
[00:33:05] Okay. Now, 
[00:33:06] part of the, uh, active aspect that I mentioned earlier is that the portfolio managers have some flexibility. So take that Netflix example I used early on. There's another company in there. I'm, we don't need to get into the names, but there's a company that they.
[00:33:20] Might buy that is below investment grade, maybe one rung or one notch below investment grade, and they anticipate that it's actually going to graduate to investment grade, just like those Netflix bonds graduated over time. Mm-hmm. We call those rising stars and um, they might use that flexibility that they have to buy a bond, that investment grade in anticipation of that.
[00:33:42] And that's what you want your active managers doing. Yeah. Making small bets around that index to again. Increase your potential income profile and total return and, and enhance that product. 
[00:33:54] Rich L: So with the experts that that are, or I should say the investment people running these [00:34:00] funds, they might find that rising star, knowing that they're gonna get higher yield because they're under under.
[00:34:07] Uh, investment grade, right, sure. Knowing that they're gonna graduate to that and now they become investment grade and you're still getting that higher yield. 
[00:34:15] Marcel B: Yeah. Right? Yeah. And just as well, there may be some bonds in that benchmark or in the exposure that they think don't offer very much value sometimes because they're very highly rated.
[00:34:25] Um, and they only offer, you know, 10 or 20 basis points, meaning 100th of a percent over treasury bonds. Now those are very high quality companies, but there may be a better, um, company that's offering better value, I should say. Maybe, um, that they can replace that with. And so that's what they're doing.
[00:34:45] They're looking at the exposures, they're picking their spots, they're batting singles around that benchmark or index. Mm-hmm. 
[00:34:52] Rich L: And one of the advantages of, again, of using ETFs is that you can do a combination of different timeframes, but also you [00:35:00] can do combinations of corporate and and municipals, right?
[00:35:03] So why would somebody wanna do a combination like that? 
[00:35:06] Marcel B: It really comes back to diversification. So for all the funds, you can go to our website, ssga.com, and you can, right. See, um, all of our funds, all of our ETFs, um, and you can find this, my income suite. And then for each of the funds you can get a better sense of the credit rating, breakdown of the geographic breakdown by state, for example, for the municipal funds to understand, um, which states you're most exposed to.
[00:35:33] Um, but there is diversification benefits in terms of owning. Corporates and munis in a portfolio. As you mentioned earlier, the munis are gonna provide less income on an absolute basis, but potentially more on a tax adjusted basis, right? And that can vary over time. There's no, uh, rule that says that, um, you know, corporates always out yield munis or vice versa.
[00:35:58] It depends on [00:36:00] what's under the hood, what's in the portfolio, what the exposures are. What the macro environment is. Um, but yeah, I mean, you, you know, you can evaluate that for yourself on, again, using that calculator tool that we have. We also have some information about tax adjusted yields so you can get a sense of, um, what may be, you know, the better, uh, vehicle for you to use and, and, and of course consult with your advisor.
[00:36:21] Rich L: We've talked a lot, um, you know about the, the benefits and are there any downfalls to using. These types of investments? 
[00:36:29] Marcel B: Um, yeah. I mean, you know, with respect to comparing them to other types of funds, um, we, we do have, for example, an A fund, an index fund that buys all the corporate bonds that are part of that Agg benchmark that I mentioned before between one and three years.
[00:36:49] And now we're talking about a very diversified portfolio with. Hundreds, if not thousands of bonds in it. Yeah. A very large fund. It is [00:37:00] indexed. Um, but our portfolio managers every month go out and rebalance that fund. They buy the new bonds that are entering the index, and then any bonds less than one year of maturity, they sell those, they're, that's run very efficiently at a very low expense ratio.
[00:37:17] And I would say that if all you're doing is trying to replicate that process. Using these stated maturity funds, it's probably not as efficient as buying that fund. Um, and so I would just make sure that you understand why you're, you're building your ladders and that you're, you understand what your outcome is going to be.
[00:37:40] Um, because typically these, these, these, um, stated maturities, my income funds are used for some sort of defined outcome in a way. Um, so. I mean, you know, this isn't what you should be doing for a hundred percent of every bond portfolio out there, right? Um, there's other sectors, of course. We have [00:38:00] active funds that benchmark against the Agg, that are core plus bond ETFs.
[00:38:04] That may be a better investment tool for you. It really depends on, on your individual specific factors that you're discussing with your advisor. Yeah. So yeah, I mean, I'm not saying that this is the best investment product out there that everyone should buy this, but if it certainly fits a need and, and it's a, it's a category that keeps growing.
[00:38:24] Rich L: I think when, when it comes down to it, it makes my job a little easier. Um, and that's always, you know, as a financial advisor, yes, I have to do my due diligence. I have to look at people's risk tolerance. I have to look at what, what the ultimate goal of that money is. And you're right, there are certain products that would fit certain people based upon timeframes, risk tolerance, income levels, and vice versa.
[00:38:47] Yeah. I mean, but these do make it easier for me to be able to plug and play, uh, a client's portfolio. Um, making sure that we know what the defined outcome is gonna be. Right. Yeah. 
[00:38:56] Marcel B: And you said something earlier at the onset that, you know, as you reach a certain point in [00:39:00] life, you're moving from growth to income.
[00:39:02] There's a lot of different ways about, uh, approaching your, your bond allocation. Um. Bonds can be a ballast to, uh, uh, you know, to, to balance out a growth equity allocation, for example. Sure. And some advisors don't like to take risk and just buy treasuries and investment grade corporates and maybe municipals, but other advisors, again, consulting with, with their clients, want more income and invest in.
[00:39:28] High yield bonds, emerging market debt, um, preferreds, different types of income products. Um, and, and neither of those is right or wrong. It just depends on your goals and how you're constructing that portfolio. Right, right. Um, so you can be earlier in your investment life, but still be taking risk in bonds instead of just stocks.
[00:39:51] Rich L: Yeah. And the last thing I'm gonna ask you, and most people associate bonds with being pretty safe. But it doesn't mean that you can't lose money [00:40:00] in bonds. And we were getting, uh, we were talking earlier about interest rate sensitivity, right? If, if interest rates are going up, bonds typically will lose value in the NAV, right?
[00:40:11] The net asset value, which is what you pay for them. However, as that NAV goes lower, the yield that you're getting increases, correct? 
[00:40:20] Marcel B: That's right. 
[00:40:21] Rich L: So, so you're getting a higher yield. It might be worth less. But when it comes, when it comes due at par, you should be able to get all your money back. At the end, basically.
[00:40:32] Right? That's right. But if you're looking to sell it early, that's where you might be. You might have to lose some, lose some principal because you've, you've sold it before it actually matured. 
[00:40:42] Marcel B: Right. You have with, with a stated maturity fund. With a My Income fund, you have more visibility that at the year, in December, that you should, that should recover with a typical bond, ETF or bond mutual fund.
[00:40:53] You don't really know when that price is gonna recover. It's gonna be more dependent on, on the interest rate environment. Great. Great. 
[00:40:59] Rich L: Any, [00:41:00] any other pieces of information that you find beneficial that you could share with our listeners?
[00:41:05] Marcel B: You know, I think that this is a unique environment that, um, you know, investing in something like the Agg that bond index, where today it's paying a yield of say, 4.5%. Um, we weren't really, really, weren't able to get those types of yields for a long time.
[00:41:22] Mm-hmm. And so, um, for a while you've been saying bonds are back, there's income in fixed income. We couldn't really say that again. In 2020 when the Agg was yielding 1%, right? When a lot of countries were adopting ZIRP, zero interest rate policy or some countries had negative yielding bonds. Um, so bonds are back, uh, and there's income and fixed income.
[00:41:45] And so if you haven't had bonds in your portfolio, you should consider adding them. That's not to say they're without risk. Interest rates could go higher. We've got a very, uh, dynamic backdrop with the Fed and, and. The administration. I'm [00:42:00] obviously, I could spend hours just talking about all that. Oh yeah.
[00:42:02] Oh yeah. Um, but, uh, but yeah, we, if you're not using bonds, I, I would certainly consider it just based on the fact that you're getting these, these really ample, uh, income from, from bonds for the first time in a long time. 
[00:42:14] Rich L: Well, this has been great. I hope it's been informational and educational
[00:42:18] this helps people understand that there's other options out there besides just equities, right? And absolutely. the information that we provide here today will be beneficial to many of our listeners. And if any of our listeners have any questions or they're interested in finding out more, um, Marcel, what's the website they can go to?
[00:42:36] Again, 
[00:42:37] Marcel B: SSGA. State Street Global Advisors. We actually recently rebranded. Now we're State Street Investment Management, but ssga.com. Then, uh, click around to learn about our ETFs or any of our investment products. 
[00:42:51] Rich L: Great, and you could always reach out to EnRich Life Podcast as well at Hello@enrichlifepodcast.com.
[00:42:57] You can also comment on any of our, uh, [00:43:00] social media posts. And please don't forget to, uh, like, subscribe and share all of these great podcasts with those that you know that would be interested in, in. Finding out more about these products. Uh, I wanna say a quick thank you to Marcel and, uh, state Street Global Advisors, uh, as well as LMC Media here locally in Mamaroneck as well as Vekterly, uh, who helps us produce this podcast.
[00:43:24] So thank you very much, uh, and we look forward to having you back another time. Thank you, Rich. Have a great day. Yeah. Thank you so much, Marcel.
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