ETF Edge - Climbing a ‘bond ladder’ 04/09/25

Episode Date: April 9, 2025

Amid the volatility, are you looking for something with stable income and the long-term investment stability of government bonds? As is often said: “There’s an ETF for that”. We’ll explain why one “boring” suite of funds might be something to get excited about now.   Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by Invesco QQQ, proud provider of access to innovation for the last 25 years. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you are in the right place. Every week, we're bringing you interviews, market analysis, and breaking now what it all means for investors. I am your host, Bob Pisani. Infloes into bond funds have been strong all year and have been accelerating since the big market drop. The ETF industry is developing new products to help investors generate a steady stream of income from their bond portfolio.

Let's talk about that with Nate Conrad, head of Lifex and Lifex ETFs, a suite of longevity income ETFs and with independent ETFs expert, Dave Naughting. Nate, you follow bond flows very carefully. Big inflows from investors that have been seeking a safe haven. We've been seeing that all year, but investors have been confounded by this recent rise in yields that we've been seeing in the last four, five, six days. What's your take on what's happening with bond yields? I think there are two big questions on the market's mind. The first is inflation. What are we going to see is the play-through from tariffs into long-term inflation?

And the second is about foreign government investment into our debt. They're one of the biggest owners. And if we shrink the trade deficit, is that going to reduce their investment in our bonds in the future? Yeah. So, Dave, let me get your take on this. This rise in bond yields is really a bit of a mystery here. He has a couple of explanations, Nate does. But lower growth, if that's what we're worried about, usually means lower interest rates.

Yet since the stock market chaos of the last week or so, yields have been rising. Can you give us your take very briefly on why yields are? A couple things. I mean, clearly we're going to have less trade. And when you have less trade, you need to finance less trade. Historically, people have needed to finance dollars. That's why every country in the world buys U.S. treasuries. It helps them manage their international trade with the United States.

If we're slowing down the amount of international trade, we should expect in aggregate the holdings of bonds to probably come down. The same is also true for folks who are just doing things like the basis trade, buying a bunch of treasuries, shorting a bunch of futures. That trades unwinding too. So all of these capital holding requirements that led to buying U.S. treasuries are kind of unwinding at the same time. So the traditional math of things are bad for stocks, everybody is going to buy bonds just isn't working out this time. because the kind of shock we're seeing is one we've never seen before. Yeah, that's a good explanation. And Nate, you've got a suite of bond ETFs.

You call them longevity income ETFs. Tell me, what do they do and why are they right for investors that might be nervous about the equity markets? So the key insight is when you buy a bond, you know exactly what you're going to get, the amount and the timing. And when you create a bond ladder, then you don't care about these changes that we're seeing in bond prices because you're going to get what you're going to get. And what we've done in our ETF is we packaged up that benefit into an ETF that gives you reliable monthly cash flow for the horizon you pick in a simple, low-cost ETF format. So how does latter bonds protect from all this chaos? Explain how they work. I mean, I know you can buy them in different maturity. So you've got one going out 10 years, LDDR. You've got one going out 15, 20, 25, 30 years. But looking at the 10-year, I want to show people what you're actually buying here. You own a bond ladder of treasuries going out 10 years.

So six-month, one year, three-year, five, seven, ten-year. And you get an annual yield of roughly 10 percent that consists of about 4 percent yield from the bonds, 6 percent distribution of principal for the next 10 years. Is that right? Explain how that works. That's exactly right. What we're really doing is we're trying to create a level monthly payout. through the end of 2035.

And so we create a bond ladder designed to do that through the way the coupons and the principal come in. And the idea is really to help make it easy to have financial security. If you think you need to spend $50,000 a year for the next 10 years, you can buy 5,000 shares of LDDR and you're going to get that $50,000 divided by $12 and a monthly payment, same amount of money every month, regardless of how bond prices go up. up or down. Yeah.

And here you see the basic idea here. I mean, this is what's kind of simple about this. You know, Dave, in theory, I could do this at home, right? I could buy a bond ladder of 30-day, one year, two-year notes, going out 10 years. I could split this $100,000 equally between all of them. I could collect the interest and then just let the bonds sell off and keep the principal. What I find, and I know about you, but nobody ever does that. I don't.

It's too difficult. for what is it, 25 basis points. They're doing this for you, right? You're a little bit wrong. Financial advisor has been building bond ladders for their clients in retirement for decades. And I know some that still do that. This is taking that idea of owning individual treasuries, which you now have to look at, and putting them in a simple wrapper that works, more like a target date fund,

where you can kind of just set it and forget it at a very reasonable fee. Actually, buying and selling these large blocks of treasuries isn't exactly fun for most advisors and most individual investors, being able to do this with a single trade, really does smooth that out. And really, you're taking one of the greatest benefits of the U.S. bond, which is that you think it's never going to default. And you're accepting that, right? The only reason that you should be worried about whether or not your treasury is trading above or below par is if you intended to sell it or if you worried somehow it was actually going to go bankrupt. When you use bonds in a bond ladder like this, you're assuming they're never going to go bankrupt.

God willing, we're in that world. And second, you're assuming you're never going to sell it, which is the right way to think about bonds as a true fixed income vehicle. Yeah, and the key point about this here, and look, here's a simple bond ladder. We just put it up here. You could have $100,000 and buy eight bonds, a 30-day bill, a six-month, a one-year, a two-year, a three-year, and, you know, a seven to ten, there are five and seven to ten. There you split it up there. They're right there. Buy 100,000, but nobody actually does.

Except Dave says some professionals do for their clients. Do you think professionals will use this or individuals or how are you anticipating it? A mix of both. You know, I'll tell you, you know, we talk to a lot of financial advisors and like Dave said, some of them do build bond loters themselves for their clients. But it's a lot of work to go out and buy, you know, 10, 20, 50, 100 bonds, especially if you want to create a month. monthly income stream. And so most financial advisors actually have a pretty high minimum. And so one of the things that's exciting to us about doing this in an ETF is to really democratize

access so that regardless of your wealth level, you can get access to it. And it's not that you need to be, you know, an ultra high net worth individual to get an advisor to do it for you. Everybody can have this. And we can do it in a way that is monthly income that can have, you know, 10, 20, 30, 40, your horizon. And you can have a choice of whether you want fixed or inflation. protected income. And I think that's a broader toolkit than even most financial advisors

can offer to their clients today in the absence of this solution. Yeah. And again, the point is you get an annual distribution of approximately 10%, it depends of where the price of the ETF is, but you're getting approximately 4% from the yield from the bonds and they're distributing the principal, which is about 6%. Exactly. So for $100,000 investment, right now, I think we were looking on your website today for $100,000 investment, you were getting $9,501 a month for 10 years. The annualized distribution is $11,000.

So you're getting roughly in the 10% to 11% range right now. So it's easy to understand. If I buy this right now, I'm going to get $9,501 for the next 10 years. And the bottom line, though, is after 10 years, all the money is distributed, right? People need to understand that you're taking the principle at the time. And what's interesting here is you can buy and sell this at any time, right? Correct. You might get a different amount of distribution every month, depending on the price,

but you can buy it at any time. Exactly. And what happens when interest rates change? This is the important thing. You're locked in, right? You know because you're not, you're holding these to maturity, right? Exactly. The mindset is you're buying today, you're locking in interest rates all the way through that end year.

So if you buy LDDR, you're locking in cash flow for the next day. So that 9501 a month is not going to change for 10 years. Correct. Okay. Now, of course, the risk here, Dave, of course, is we get inflation. And this becomes, that $9,501 becomes a little less valuable. Nothing here is protecting your, nothing's really protecting your buying power here. They do have an inflation protected version of this. But there is no way to guarantee that if we have 10% hyperinflation, that anything is going to necessarily keep perfect track with that. This is a fantastic tool for immunizing liability. If you know that you've got certain payments that you're going to have. to make, say like a mortgage on a second property or college payments that you're trying to make. This is a great way to take that cash flow and put it out of mind so that you know it's covered.

I think this is a great psychological tool for a lot of investors. It's much easier to let something ride when you know it's going to pay out in the end. Yeah. This is a good time to bring up tips because there is an inflation protected version of this as well. Obviously you get a different payout on that. So if you're going to if you're going to pay to have inflation protection, the payout's not going to be as much, right? That's exactly right. So it'll start lower. And then if inflation is as expected or higher than expected, it'll certainly be more over time.

And under the hood, it's effectively the same product, but we buy inflation-protected government bonds instead of regular bonds. Chartered the same fee, we're just creating a different bond ladder for you to solve a different problem for you. So and here's the full screen here. The advantage of having your cash one here is you get more money now and with the tips, that's Treasury, inflation protected securities tips, inflation protectures becomes more important long term. Exactly.

I mean, if you're doing it for 20 years, you might want to get some inflation protection. That's exactly right. You're basically trying to decide, what do I want here? If I just buy this for 10 years, do I not care about inflation? I just want to know I get $9,500 a month. That's what I care about. I'll take the inflation risk. Or you can get less money and buy inflation protection.

Exactly right. And you have both choices available to you. Yeah. Why government bonds, and it's all treasuries here, right? You're not buying corporates or munis. Why just treasuries? So the idea here is all about helping people create financial security. And when you look at how things are going this week, it's a volatile time in the market,

stocks and bonds. And it's a rough time to be in corporate bonds. It's a rough time to be in munies. And if this product is there to create financial security for you at a time like this, knowing that it's treasuries and that you're in the bond that is least likely to default on you, is really important to maintain peace of mind in the really tough times. That's what this is about. Let me ask you about the tax treatment because this gets very important to a lot of our viewers who are older here. When I pay taxes, I'm paying taxes just on the dividend, right? Not on the principal.

Is that right? Correct. You tell me. Exactly. So of course, this is only relevant in the taxable account, not yet for O1K or IRA. You're going to pay tax on the treasury interest component, which is about 4% a year of taxable income right now. You're not going to pay tax on the principal. That's part of what's so powerful because the fact that we're distributing your principle along the way means more post-tax spending power along the way and lets you keep your other assets invested. And, you know, Dave, I don't know if you have any thoughts.

I know you're not a tax advisor, but this kind of account, would it matter at all to be, if you were in a 401K, you know, tax protected account or you were in a taxable account? or would a taxable account? Would that matter at all? In general, in general, you're sort of wasting the tax benefit of the return of capital kind of contribution, which I've been writing a bunch about how return of capital can actually be a helpful tax hack. In this case, you are genuinely just getting your principal back in between when you buy it

and when you sell it, you'll be writing your basis down until it gets very close to zero until at some point you literally don't have anything left because everything has been distributed. So in some ways, you can- 401K or a taxable account? What's the simple answer? I think this is way better in a taxable account because you're getting the maximum advantage out of either the tips themselves, if you're going that route and out of that return of capital way of deferring spending or spending down your own savings. So I think this makes more sense in a taxable account. And I think it's a great way for folks who maybe not even think about

retirement long term goals, but just want to capitalize, say, on a spike in interest rates. I mean, we see the 10-year cross 5%. People are going to ask, well, how do I take advantage of it? At this point, you're going to be able to buy a product like this, which will lock in the implied payment from a spike in interest rates like that. Would you agree with that? I know you guys aren't tax accounts, but would you agree with that, generally, a better in a taxable account?

More tax efficiency in a taxable account, that's for sure. If you do have most of your assets in a 401k or an IRA, you can use it there, and it's a really nice way to help have cash flow to meet RMDs, make your life really easy with that time counts. Not to be morbid, but what? What if I die before I get old? No, I'm sorry, that's a who song. I don't mean that.

What if I die before the term is over? Does that... It's just an ETF. So the ETF is going to pass right to the estate to whatever the beneficiary is. Unlike an annuity, right? If you die, you lose it, right? Here, if I die, it goes to my estate. Exactly.

Right? The simplest way to think about what we've done, in some ways this is just a treasury ETF. That's where the return comes from. It behaves in all those same ways. The magic is in the way we pick the bonds. so that you get the cash flow out safely through maturities instead of through selling and taking the market risk that we're seeing really play out this week.

Yeah. And Dave, as you noted, Bob, there's that, go ahead. There's actually a, there's a benefit if you die. I mean, it's not great for you, but for your heirs, because this is being, is going to distribute return of capital month after month, if your heirs end up inheriting it, all of that gets wiped out and the basis gets reset, so you never end up having to worry about taxes on that component. Yeah, but you're right. Dying would not be good for me. Brilliant observation there, Dave. Thank you. There's a reason I have you, Dave, to point out these things to me that helps.

Dave, you're sort of the overall guru for ETS. I often go to you about this. This seems like a great product. Is there anything that raises any red flags to you about this? I mean, people should know that we haven't covered already in your mind. Yeah, I mean, the main thing is you need to understand that when things happen, like what's going on the market right now, where we have the bond market sell off, the net asset value of these is going to come down. And that's going to be a shocker. You're going to be, wait, my bond fund that's supposed to be stable is down a few percent. That's completely normal.

You shouldn't care because the whole point of this is holding it to completion, holding it to maturity. So this isn't a product to be day traded. This isn't a product to be worried about the NAV. They're, to be blunt, very boring in construction. And I'm a big fan of boring when it's delivering an actual pattern of returns that investors need, which this one is. Boring is good. I mean, you follow, I don't know if you follow ETFs like Dave and I do, but it's been dizzying the amount of new ETFs this year and some of the strange flavors they've been coming in. I always say you've got to be able to explain it to your mother. One of the reasons I like this product is I could explain it to my mother.

Okay, Mom, you give my $100,000, you're getting $9,500 a month for the next 10 years. My mother understands that, and that's one of the things that I like about it. You're part of Stone Ridge Holdings, right? This is a big asset matter. Correct. Like 25 billion. Can you tell us briefly about Stone Ridge? So Stone Ridge, we're based here in New York City. We work up by Grand Central.

And the motivating idea of our firm is really to help people create financial security. One of the ways we do that is by providing access to things that are different than stocks and bonds help people make money in different ways that really don't move around in weeks like this, things like reinsurance. And then LIFEX is the other big arm of that. And for us, it all comes down to a pretty simple test, similar to what you said, can I explain it to my mother? We build products that we want to invest in for ourselves

and that we want our mothers to invest in. So I've been working on Lifex for about seven years. My mother's retired, my father's retired. I built Lifex for them. Good for you. My mother who's still alive at 97 would be smiling right now. Reinsurance, so you mentioned that as part of Stone Ridge here. Why is Reassurance an interesting alternative asset?

So the idea of reinsurance. insurance is you make money by collecting insurance premiums and you lose money when there's a natural catastrophe like if a hurricane hits Florida. Has nothing to do with the stock market, has nothing to do with the Fed. It's just unrelated, but it's a very old way of making money. I don't think anybody who's watching today thinks that when they buy insurance, if they're going to make money buying insurance, everybody probably thinks their bill is too high. Reinsurance is a way of being on the other side of that trade, but to earn money in a way

that's just unrelated to stocks and bonds and provides a little bit of a safe haven in the portfolio. And everything's when a catastrophe hits, the insurance companies are in a disastrous state, but actually they end up raising rates. And so that ultimately in the long term, they do better. Correct. On average over time, you have to make money. There will be times you lose money, but you take comfort that you do get the opportunity to raise rates after the fact if you need to.

And that when you lose money, it's going to help people in their time of the greatest need. It's a real utility in society for insurance. and you're providing capital to make that possible. Of course, drag in the social benefit parts because you're a good son and your mother and father would be very happy for you. Sorry about the digression on reinsurance folks, but it's a very interesting crowd that we've got here.

Interesting. We're going to leave it there. Are you looking for a steady flow of income amidst the stability of bonds? As we like to say, there is an ETF for that. Here's my conversation with Nate Conrad. He's the head of Lifex and Lifex ETFs, a suite of longevity income ETFs, along with independent ETF expert.

Dave Naugick. And here's the tag out in three, two, one. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. Continuing with us now is independent ETF expert, Dave Naugick. Dave, we just had a fascinating conversation about the bond market and bond ETFs with Nate Conrad from Lifex.

But I wanted to get your take on where the flows are this year because it's been pretty wild so far this year. Give us a sense right now what your overall taken. What kind of inflows are really notable? What kind of outflows are really notable? Yeah, so broad picture, if we look sort of at the year to date so far, like how have we been doing? We're actually crushing. We've about 315 billion inflows so far a year to date, which would put us on track for like

just about the best year ever, which is fantastic, obviously. And if you look specifically sort of what's gone on in the last week here, while markets have been selling off, while we've had all this volatility, on a net basis, ETFs are still buyers, right? We've still got positive flows into boring, large-cap US equity. Vanguard continues to pick up assets every single day, right?

So as a class, I think it's fair to say ETF investors have largely been buyers on the way down day after day after day. We really haven't had any giant negative flows writ large where we could start blaming, say, the average ETFF investor, for what we're seeing in prices. On the flip side, I think ETF investors have been a bit of a break on some of what we've seen in prices. But there have been some notable pullbacks there. I'll highlight

one individual fund is the one that I think is the canary in the coal mine. It's a fund that I think is great. JP Morgan's short-term bond fund, JPST, which is just Hoovered assets for years, has lost $3 billion in the last week. It's crazy. So we've seen a lot of folks pulling back out of some of the years. What does that tell you, Dave? What's happening there? Because obviously, short-term bond funds have been all the rage. Nobody wants to go out too far on the yield curve.

So short-term people have been piling into. They love those four or four-and-half percent yields in the short term. What they don't seem to like is what they don't seem to like is the active management, right? So in the last week, we've seen actively managed bond flows lose $3.5 billion, dollars while at the same time boring old index funds have pulled in another two billion dollars in bond flows so we've seen this sort of shift what does this tell you that they're thinking that the active managers can't handle this or what what yeah that's that's the vibe i'm getting is nobody knows anything right i mean if you read what investors are saying whether it's you know on lincoln or

reddit or anywhere else they don't think that active managers know any more than anybody else in this market i think the fact that we've got both bonds and stocks tanking at the same time has really spooked a lot of investors. And when people get spooked, they do two things. They either go back to their knitting and they stick to really traditional boring plays like buying the TLT or buying spy, or they go out way on a limb and they do crazy stuff.

And we've seen a lot of flows into the crazy stuff too. Yeah. Speaking of crazy, leveraged and inverse ETF, particularly leverage single stock ETFs, were all the rage, at least going into going into April or the end of March. And we've seen just crazy numbers in the last few days. Of course, as people simply basically get out. Talk a little bit about that. Yeah, I mean, we've seen a lot of interest in the leverage and inverse complex.

I will say over the last week, what we've really seen is a lot of inflows into very specific equity dip buying plays. I point out the triple leverage semiconductors is a big one there, where the triple leveraged cues, which is TQQQ. So we've seen billions flow into those two products just between themselves. That implies there are a lot of people out there trying to really call the dip and make a big bet on it. On the flip side, we've seen some outflows in some of those single stock ETFs you're talking about, but not as much as you'd expect net net over the last week. We're up about $300 million in those single stock funds.

We're up about a billion in things like short volatility on the leverage side. So we all know what those kind of plays look like. These are people making bets. They're not people making investment decisions or reallocating their portfolios. They're just gambling with ETFs. Yeah. And of course, with these levered ETFs, they reset on a daily basis. So if you get a volatile market, the losses really can compound very, very quickly.

And you won't even get the returns you expect. I wrote a piece on this on my blog at nodding.com this week about the micro-strategy ETFs, of which we got plenty of them that will offer you leveraged or inverse exposure. Obviously, it would seem like being in the inverse fund had been a great call over the last week. But in fact, I ran these numbers a day or two ago. If you'd held those inverse funds for the last week, you'd actually done worse than being in micro strategy long. And that's because, as you said, in a volatile market, the path dependency of these products means your pattern of returns is not going to look anything like you predicted. Yeah. So we've had generally outflows in high yield. That makes some sense. I mean, if there's a risk of a slowdown, I mean, that makes some sense to me. High yield is a credit play, right? So higher default potential. And we've got people already pulling back on earnings guidance. Yeah. Like I think it's tough to be behind the average corporate right now when you've got Delta Airlines, which is up huge on the day right now, but at the same time said, we're never giving anybody guidance again.

effectively. And I think you're going to hear that from. They just say they don't have any visibility and they withdrew their guidance. Yeah. Right. And you're going to see, I think you're going to see that from every major player on Wall Street is going to say we cannot give you forward guidance because life is too complicated. And I think that actually sets the stage for the removal of forward guidance as a thing companies even talk about. It may be months, quarters or years before we get any kind of forward guidance out of the top of the S&P 500 again. Finally, we had these products that have been popular the last couple of years, buffered products,

and they provide some upside in the S&P 500, but more importantly, provide downside protection. Correct. If you're within those bands, they work pretty well, though. What kind of flows are we seeing? Yeah, and look, there are a bunch of these products that have nice buffers that are around 20%, meaning you don't experience the first 20% of a drawdown, a surprisingly convenient number, given that we're hovering around a 20% drawdown, depending on whether the market moved in the last five minutes. So a lot of people are looking at these funds saying, well, are they doing what they say?

The challenge is almost all of them reset on a calendar quarter. So most of these funds reset to brand new options exposure on April 1st. And it will then come due, if you will, their options bets pay off at the end of the quarter. Right. So we've got quite a ways to go. In between those dates, these funds can and do trade all over the place. So you'll see all these buffered funds, trading down because the options they own are trading down. However, mechanically, mathematically, they will come back and deliver on that buffer if we are still down 20% in three months. But the point is you have to buy on the first day to get exactly what's advertised. Otherwise, it changes. What's your point here? Yeah. On any given day, you need to go look at the website

for whichever provider you're looking at to understand if I buy today, what's my cap, like what's my maximum them upside I might get and how much of a buffer do I have on a downturn? When they reset these products, they have nice round numbers, but you're probably not buying on a quarter or a month start. You're buying an average Tuesday, so you've got to go look. You can get protection, folks, but it gets very, very complicated to follow it. But that's what we do here on ETF Edge. And Dave, thank you very much. That does it for the ETF Edge podcast. Thanks for listening. Join us again next week, or remember, you can go to ETFedge.c.c.com and see all of the shows. How does InvescoQQQ rethink possibility?

By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility, Invesco Distributors, Inc.