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Muni ladders for income and rising rates

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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Christopher J. Harshman, CFA, Municipal Portfolio Manager, Eaton Vance Management

      New York - We see more financial advisors and investors tapping municipal bond laddered strategies to refine their duration exposure and plan ahead for rising interest rates.

      However, muni ladder strategies can be executed in several ways. For example, the most obvious and straightforward approach is to buy individual bonds. Yet, the do-it-yourself approach can be very time-consuming and costly.

      Fortunately, investors can access professionally managed ladders. In the fragmented and idiosyncratic muni market, we believe professional managers can bring many benefits to the table for individual investors. These include expert credit analysis, broad new-issue and secondary market access, and institutional buying power.

      Yet beyond those common attributes, we believe investors should pay close attention to the individual details of investment strategy and process. That's because significant differentiation among managers exists, which can in turn impact performance.

      We find manager differentiation can be significant with regard to portfolio structure or positioning, flexibility or customization options, and even performance. Strategy experience, with an established track record, is another key area of differentiation across various investment vehicles.

      Some protection from rising rates is an important attribute that investors expect from a laddered strategy, but one that may not be not universally delivered. Not all ladders are equal. For example, with regard to portfolio structure and positioning, only an equal-weighted laddered strategy is designed to consistently and predictably be defensive against rising interest rates. It's perhaps a subtle difference that can have a very meaningful impact on performance when rates rise.

      Many investors find value in a laddered strategy, but one size doesn't fit all. Investors have different goals, time horizons, tolerance for risk, expense preferences, etc. As a result, some investment types may be better suited than others, based on what the investor is trying to achieve.

      As mentioned, there are many ways to approach a laddered strategy. Investors can build their own portfolios with individual bonds. Or, they can opt for professional management through a separately managed account (SMA) or mutual fund, for instance. Each approach may offer different diversification, liquidity, expense and minimum investment profiles. The good news for investors is that there are a range of choices to help them meet their needs.

      Bottom line: Understanding the nuances between investment vehicles can help individual investors discover product structures that may better meet their investing goals and expectations. Investors looking to implement laddered investing may benefit from considering all the vehicle types available.