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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35351  
Subject: Response to Cashflowrules/Bond Ladders Date: 8/27/2007 8:09 AM
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This my first post. I was interested in thre bond ladder and wondered if there was any way to create this using ETF products? Otherwise any recommendations on how to create a similar vehicle for generating income?

Thought this needed a new thread.

Welcome to the board.

Suggest you read the FAQs to get started.

In answer to your question, bond ETFs are bond funds and not something you can ladder. Bond funds can generate steady income, but you have to watch out for interest rate risk, which will reduce the value of your shares if interest rates go up (and interest rates are still well below historical averages).

A ladder would be created using individual bonds and/CDs. If you hold to maturity, you will get back your original principal (unless a bond defults).

The basic idea behind laddering is that you have a bond or CD maturing at regular intervals, which provides steady cash flow (important after retirement) and lets you capture the ebb and flow of interest rates (like dolar cost averaging into stocks). Depending on what bonds/CDs you use, you can have an income flow from some or all of the bonds/CDs or, with CDs and in a different way TIPS, the dividends can be retained in the bond/CD and you get the whole thing back when it matures.

What to put in your ladder is a different problem. It depends on what maturities you want in your ladder and on how much risk you want to take on. Also, for bonds you buy on the open market (most corporate or municipal bonds, Treasury bonds/TIPS if not bought at auctions), you need to factor in commissions, which can take their toll if you are buying in small amounts.

In recent years, most of us have been leaning toward CDs or, sometimes, TIPS on the "safe" side. CDs have usually been available with higher yields than high investment grade corporate bonds or Treasuries.
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