How should one position an investor today who only wants an allocation to US securities?

By several fundamental valuation ratios including the Q Ratio and the Shiller 10 Year CAPE, US stocks are at historic valuations. These valuations translate into a forward looking approximate expected 1% return over the next 10 years. On the other hand yesterday the 10 Year Treasury Rate closed at 2.19%.

A fixed-income approach may be more attractive for US investors today yet it comes with an obvious hitch. The secular bull in bonds may have ended in July 2012 when the 10 Year Treasury Rate touched 1.53%. 

We can most likely rule out a rapidly rising rate environment in the immediate future however it is easy to see how scary the ride can be when you look at the following table for the 10 Year Treasury.

The Advantage of Bond Ladders & Bond Ladder ETFs

Shorter-term ladders forgo the benefits of higher long-term rates, but adjust more quickly to rising rates.

Longer term ladders gain the benefit of higher long-term rates, but adjust more slowly to rising rates.

10-year ladders may be the sweet spot for a gradual rise or fall in rates.

This is illustrated via the following Crestmont Research tables and chart.

Overall, combinations may be the optimal secular approach:

A) 5 and 10-year ladders for a secular gradual rise in rates

B) 20 and 10-year ladders for a secular gradual fall in rates

Today investors now have available corporate bond ladder ETFs, such as Guggenheim Investment’s BulletShares and iShare’s iBonds, which provide a more convenient inexpensive way to invest in ladder combinations.

The primary caveat is that these ETFs hold small percentages of both redeemable and callable bonds which means that in the event of a bond redemption or call, proceeds may sit idle in shorter maturity instruments until the time the ETF is liquidated.

Here is a list of them.