Bond laddering not a sound strategy
I would like to comment on your recent article “Bond ladders for fans of safety” (InvestmentNews, May 12).
Although I would agree with the statement that bond ladders shine in a rising-rate environment, we have had a trend of lower rates for more than 30 years, and the so-called experts have been calling for higher rates for more than four years.
Like the boy crying wolf, they will eventually be right. The problem is when. One year? Two years? Four years?
Everyone is entitled to his opinions, but not his own facts.
Individuals are starving for yield, and with the current steep yield curve there is a huge opportunity cost involved in employing a laddering strategy. If we look at AA-rated munis, there is a give-up of over 200 basis points a year by employing a 10-year ladder versus buying the sweet spot of the curve, 20-year maturities.
Recent AA five-year munis, which are the average of a 10-year ladder, yielded about 1.2% versus 3.6% for 20-year bonds.
From a dollar perspective, laddering a $1 million portfolio would generate about $12,000 per year versus $36,000 for 20-year maturities, a give-up of $24,000 a year. For a $2 million portfolio, the opportunity cost is $48,000 a year.
With the real unemployment rate close to 12%, anemic economic growth of 2%, and little or no inflation, I do not see any of the elements necessary for higher interest rates.
There is almost universal consensus among the experts that interest rates must rise. When was the last time universal consensus as to interest rates, stock prices, commodities or real estate turned out to be correct?
BER Financial Group
Watch out for sizzle around strategic beta
I enjoyed the article “Strategic beta taking its place in the sun” (InvestmentNews, May 26). I think this will be a massive growth area. As ETFs grow in popularity I think the majority will be some sort of strategic beta, because we don't need another S&P 500 index fund.
Unfortunately, like most things with Wall Street, there will be some good, some bad and some ugly out there, as it is easy to curve fit any back test you want and create some sizzle around a concept that has no real basis in fact.
We have integrated strategic beta into our traditional tactical strategies as an S&P 500 substitute. We also have launched a new tactical core/satellite strategy that uses some select strategic beta ETFs as a core instead of market cap indexes.
CEO and CIO
Tuttle Tactical Management