Developing laddered portfolios
A bond ladder is a portfolio that invests across a range of maturity dates, or rungs, allowing the principal to be continually
reinvested as bonds mature or are sold. This approach to fixed income investing may be useful for creating a stream of income and
helping to manage interest rate risk.
1 Nuveen traces its history back to 1898. Nuveen's asset management business was established in 1989.
2 As of 30 Sep 2020.
3 Cerulli Associates, The Cerulli Report, U.S. Managed Accounts 2020. Data as of 31 Dec 2019, most recent data available.
4 Nuveen, Morningstar Direct as of 30 Sep 2020. Based on total net assets of U.S. open open-end funds for the Nuveen Family of Funds and the TIAA-CREF Funds, excluding exchange-traded funds, money market funds and fund of funds. Based on a review of 677 fund families and 102 fund families with municipal offerings.
The projections or other information generated by the Nuveen Municipal Bond Ladder Tool regarding the likelihood of various investment outcomes are hypothetical in nature and do not reflect actual investment results that any particular investor actually attained or of any specific Nuveen product. Past performance is no guarantee of future results. All investments carry a certain degree of risk, including the loss of principal. Investment objectives may not be met. The use and output of this calculator is for educational purposes only and should not be considered investment, legal, financial planning, or tax advice. The output is general in nature and may not apply to your individual tax situation and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions. All outcomes/yields/returns do not reflect the deduction of management fees, transaction costs and other expenses that an investor will incur. Product availability and customization options may vary by firm and platform. For more individualized information, you should consult your tax advisor or investment professional.
CUSTOM PORTFOLIO ASSUMPTIONS
Information presented is based, in part, on hypothetical assumptions entered by the user. No representation or warranty is made as to the reasonableness of the assumptions made or that all the assumptions used in achieving the returns have been stated or fully considered. Simulated results have many inherent limitations and no representation is made that any account will or is likely to profit similar to those shown in the scenarios. Actual performance results may differ, and may differ substantially, from the simulations. Changes in the assumptions may have a material impact on the hypothetical results presented. The use of tools cannot guarantee performance. Any references to future returns should not be construed as an estimate of the results a client portfolio may achieve. The calculator makes certain assumptions that may not apply to you. You have sole responsibility for any decisions you make based on the output of this calculator.
The hypothetical laddered portfolio is defined by user inputs (i.e. the maturity start and end year in the tool above) where an equal investment is allocated to each maturity from “x” to “y” years. The length of the ladder “x” to “y” is determined by the “Ladder Range” input. As the first year bond matures or rolls down outside the specified ladder range and needs to be sold, additional bonds are purchased on the furthest rung of the ladder using those proceeds. It is assumed that bonds are purchased at a price where the coupon equals 5% and the yield equals the yield on the weighted average yield curve corresponding to the appropriate maturity. “Income” refers to yield at the time of purchase.
The user can select between reinvesting their annual income or withdrawing annual income. Reinvestment of income assumes that the income from year n is reinvested across the ladder evenly into yields at year n+1, which may depend on user inputs in the shock scenario.
Yield curves are calculated using a weighted average of the AAA rated MMD curve, the AA rated MMD curve, and the A rated MMD curve based on credit weightings used in Nuveen Asset Management ladder portfolios. It is assumed that bonds are purchased at a price where the coupon equals 5% and the yield equals the spot rate on the weighted average yield curve corresponding to the appropriate maturity.
Maturing and sold proceeds are reinvested at the new adjusted yield in the longest rung of the Ladder. Each rung has a specific duration. Duration is a measure of the sensitivity of the price of a fixed-income investment to a change in interest rates. The Modified Average Duration to Maturity is the average duration of the portfolio assuming bonds will not be called. The Average Maturity is the average maturity of the portfolio. The Yield to Worst at Inception and Tax-Exempt Yield is the average yield to worst of the portfolio. The change in yield is determined as follows: After one year, what was originally an “n” year bond will be an “n”-1 year bond with a yield equal to the original “n”-1 year yield, plus or minus any yield change applied from the model’s Interest Rate Shock inputs. The annual total return of the laddered portfolio is calculated by adding the average annual coupon income from each bond and the weighted average of the change in price of each bond assuming each maturity has an equal weighting of the portfolio. The change in price of each bond is calculated by subtracting the price at the beginning of the year from the price at the end of the year divided by the beginning price. The bond prices are derived using the present value formula assuming non-callable bonds, redemption at par, semiannual coupons and are calculated off of the change in yields as detailed above.
The price of a bond equals the present value of future coupon payments plus the present value of the face value (which is returned at maturity). Present value of a bond is the current value of the future stream of cash flows and future redemption amount discounted at prevailing yields. The present value formula has the following inputs: yield, number of periods to maturity, coupon, and redemption value.
A Word on Risk
All investments involve risk and there is no assurance that an investment will provide positive performance over any period of time. An investment in any municipal portfolio should be made with an understanding of the risks involved in investing in municipal bonds, such as interest rate risk, credit risk and market risk, including the possible loss of principal. As interest rates rise, bond prices fall. The value of the portfolio will fluctuate based on the value of the underlying securities. Credit risk refers to an issuers ability to make interest and principal payments when due.
Investors should contact their tax advisor regarding the suitability of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer.
INTEREST RATE SCENARIOS
The Interest Rate Scenario Analysis contains numerous assumptions and different assumptions could result in materially different results. Certain information provided may constitute forward looking statements. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors, which include but are not limited to market developments; legal and regulatory developments and other risks and uncertainties.
Yields, cumulative income and total return do not reflect the deduction of management fees, transaction costs and other expenses that a client would incur, which will reduce the value of a client’s portfolio, nor does it reflect the impact of taxes. Further, they will be impacted by the reinvestment of income, market value changes and/or other earnings.
The Tax Cuts and Jobs Act of 2017 doubles the standard deduction and implements a limit for itemizing state and local income taxes, state and local property taxes, and sales taxes beginning with 2018 tax filings. Since it is expected that fewer investors will deduct state income taxes for federal filing purposes, this calculator does not contemplate a federal benefit for state taxes paid, and the effective tax rate therefore represents the applicable federal income tax rate plus the applicable state income tax rate. If you itemize your deductions and have not exceeded your cap on deducting state taxes, your taxable equivalent yield will generally be lower than the rate calculated above.
Taxable income is your gross income, less certain adjustments (expenses, qualified account contributions, alimony paid), less exemptions (personal and dependent) and all deductions (mortgage interest, property taxes, charitable contributions). For calculation purposes, the tool assumes the ‘Single’ Filing Status. There are additional statuses available that are not reflected in this tool.
The displayed rates have been rounded to the nearest hundredth of a percent. The Top Tax Rate on Investment Income may not add up to the displayed rates due to rounding.
In tax years beginning in 2013 and later, a 3.8% Net Investment Income Tax (NIIT) applies to individuals, estates and trusts that have net investment income above applicable threshold amounts. This is commonly referred to as the Health Care Tax.
Alternative Minimum Tax (AMT) is ignored in this analysis as the effect cannot be calculated only with taxable income. It is possible that it could impact your marginal tax rate. Some local jurisdictions may levy an income tax even though they are not shown as a choice in this calculator. If this is the case your marginal tax rate may be higher than what is displayed.
Income is grossed up at [1 minus the Effective Tax Rate] and all interest income is exempt from Federal Tax. If state portfolios are selected, all interest income is exempt from State & Federal Tax.
Taxable-equivalent yield is the yield a taxable investment needs to possess (before taxes) for its yield to be equal to that of a tax-free municipal investment.
A separately managed account (SMA) is a private portfolio of actively managed, individual securities that may be customized to achieve an individual investor's unique objectives.
SMA accounts typically require a minimum investment of $250,000 for fixed income strategies, although the specific minimum account size varies by program and may be subject to change. The manager may waive these minimums based on client type, asset class, pre-existing relationship with client and other factors. For certain accounts, a negotiated minimum annual fee applies. Please consult with your Nuveen Advisor Consultant for applicable minimums.
Nuveen Asset Management, LLC is a registered investment adviser and an affiliate of Nuveen, LLC.