Looking to buy bonds? Try building a bond ladder

Buying bonds directly falls out of the realm of the ETF Newsletter domain, but I came across the article below and wanted to share it.

Chip Cutter, AP Business Writer wrote an article that I found on philly.com about building a bond ladder. Here is an excerpt:

Q: How does laddering work?
A: With laddering, an investor can put some money in short-term bonds, such as those coming due in less than a year and distribute the rest in bonds maturing years down the road.When each bond matures, consumers can then re-invest that money in another bond of a similar interval to keep the ladder standing.

Q: What's the benefit of laddering?
A: Essentially, laddering ensures that you don't lock up all of your money at one interest rate. By choosing bonds with varying terms, investors can protect themselves from unexpected fluctuations in interest rates.If rates rise, for instance, bondholders will have money available to take advantage of the higher yields. On the flip side, if rates fall and the prices of bonds rise, the balanced portfolio will still be cushioned against the increases."It's not magic," said Jim Vogel, a debt analyst and director of fixed income research at FTN Financial. "But it's just an excellent foundation."

Q: How would this work in practice with Treasurys, for example?
A: Howard Simons, a strategist with Bianco Research in Chicago, said it helps to divide Treasurys in five "buckets," so to speak. Place the first 20 percent of your investment in short-term Treasury bills maturing in less than a year, and the rest in equal amounts of two-, five- and 10-year bonds, plus those maturing even later.Such a broad spectrum of bonds, all with various terms, helps to protect against any sudden changes in interest rates.Investors can custom tailor the ladder to meet their needs, too.

Those hoping to play it safe can invest more heavily in short-term bonds, which are less prone to rate changes. Investors who want higher yields - and are willing to accept more risk - can load up on longer-term debt."It's really just that simple," he said. "There's really no right mix on this."

Q: Some claim, though, that bond laddering is an oversimplified strategy. True?
A: While investors won't earn jaw-dropping income from a bond laddering strategy, it is an easy-to-understand, convenient way for everyday consumers to manage their own investments, Vogel said."It is always a benchmark strategy that deserves first consideration," he said. "You need an argument to move away from laddering, rather than an argument to begin it."It's especially effective for investors who aren't looking to do a lot of back-and-forth trading, he said.

The complete article can be found here.

I did a little research and found an ETF that uses the bond ladder approach. It was created by Canadian-based Claymore Investments and the name of the ETF is Claymore 1-5 Yr Laddered Corporate Bond ETF (CBO-T). Here is the website: http://www.claymoreinvestments.ca/etf/fund/cbo. The ETF is very new; inception date was this past February so there is not much history.